A Commercial Guide to Sri Lanka

Introduction
Chapter 1 - Political and Economic Environment
Chapter 2 - Sri Lanka as a Business Partner
Chapter 3 - Selling Netherlands products and services
Chapter 4 - What can the Netherlands Embassy do for you?
Chapter 5 - Customs, Trade Regulations and Taxes
Chapter 6 - Investing in Sri Lanka
Chapter 7 - The Labor market
Chapter 8 - The Financial Market
Chapter 9 - SWOT Analysis
Chapter 10 - Important websites of Government agencies and offices
Appendix 1

Introduction
This business guide has been created to provide a clear overview of the inns and outs on doing business in Sri Lanka. Sri Lanka, in all its natural splendor, definitely has possibilities for foreign exporters and especially investors, although one must stride carefully as business life is not easy in this country. It is important to thoroughly calculate ones risks before entering into any form of business in Sri Lanka. Step one in setting up a business in this country should therefore be to find a reliable agent, who knows his or her way through the extensive amount of laws and rules.

The information presented in this guide is a compilation of numerous sources, ranging from direct interviews with Netherlands as well as Sri Lankan entrepreneurs in Sri Lanka, related websites, the various Chambers of Commerce, existing trade guides, and the governmental bodies concerned. It is important to note however that this commercial guide remains an estimated guess, in which it is possible for, for instance, trade figures to deviate away from the truth. This can occur as rules and especially figures seem to vary each day and are known to be subject to unpredictable change.

In conclusion the Embassy hopes this guide will increase foreign awareness as to the existing business culture in Sri Lanka and with it facilitate long-term trade between Sri Lanka and the Netherlands.

Chapter 1 - Political and Economic Environment

1.1 Political Environment
1.2 Economic environment
1.2.1 Budgetary policy

1.1 Political environment
Sri Lanka gained in full independence in 1948. Under the name of Ceylon the sovereignty of the nation came with a dominion status in the Commonwealth of Nations. In 1972, the country became a republic within the Commonwealth, and the name was changed to the Democratic Socialist Republic Sri Lanka. Sri Lanka is governed under the constitution of 1978. Administratively, the country is divided into nine provinces and subdivided into 25 districts. Each province is administered by a directly elected Provincial Council.

The president, who is popularly elected for a six-year term, is both the chief of state and head of government. Members of the 225-seat unicameral parliament are also elected by popular vote for six-year terms. Mahinda Rajapakse of the Sri Lankan Freedom Party (SLFP) won the last presidential elections in 2005. Other main political parties in Sri Lanka are the Peoples Liberation Front (JVP), the United National Party (UNP), the Sri Lankan Muslim Congress (SLMC) and the Tamil National Alliance (TNA). Armed opposition is employed by the Liberation Tigers of Tamil Eelam (LTTE), who press for self-rule in the northern and eastern province, which has provided major political tension in the country for decades.

After two decades of fighting, the government and LTTE formalized a cease-fire in February 2002. Since the implementation of this cease-fire, Sri Lanka has seen increased interest on the part of potential foreign investors. Violent clashes between Sri Lanka’s armed forces and the LTTE have escalated steadily again since November 2005 presidential election. The current political situation and the escalation of violence though may have a serious negative impact for business and investment and sound economic development. It has tended to depress the overall flow of funds into the country.

Over the past two years Sri Lanka has begun to change course economically and has headed in a more statist direction. The change of government did as yet not result in a radical change of (macro) economic and private sector development policies. The government elected in November 2005 of President Mahinda Rajapakse has not taken significantly different economical stances from the previous government. It is expected that Sri Lanka will in general continue to pursue open economic policies, and its attitude towards foreign investment will remain positive. There is however still little interest in economic reform and the privatization of unprofitable state owned enterprises, including “strategic” enterprises such as state-owned banks, airports and electricity utilities. Instead the government plans to retain ownership and management of these enterprises and make them profitable. At the same time it is taking steps to further expand its already extensive civil service. One reason for this low interest in economic reform is because the government is a coalition of political parties with varied interests. Another is that President Rajapakse has generally has been highly supported by Marxist extremists, who have used this influence to block useful economic reforms.

President Mahinda Rajapakse’s broad economic strategy was outlined in his Presidential Policy Statement to the Parliamentand in the “Mahinda Chinthana”(Mahinda’s Thoughts) “ Vision for a New Sri Lanka”, a ten year horizon development framework 2006-2016. It follows the previous government’s Economic Policy framework ( www.treasury.gov.lk) which focused on developing the small and medium enterprise sector, agriculture and infrastructure, and has a heavy reliance on government intervention in markets. President Rajapakse’s policies also have a heavy focus on poverty alleviation and redistribution of economic gains to disadvantaged areas. A community based integrated rural development initiative has for instance been set up to empower the poor. In addition the budget identified a list of national and rural infrastructure projects to be developed in the next few years, such as physical infrastructure (roads, irrigation, electricity, ports and airports) development to improve the economic opportunities in rural Sri Lanka.

1.2 Economic environment
Sri Lanka has a population of 19 million, growing at 1,3 % a year and is roughly one and three quarters times the size of the Netherlands. Sri Lanka is considered a lower middle-income developing country with an average per capita income of US$ 1,100 for 2005. Total Gross Domestic Product (GDP) in the country is US$ 23 billion and per capita GDP is the highest in South Asia, Maldives excluded. In 2006 violence has escalated and the economic outlook for 2007 will largely depend on Sri Lanka’s internal security situation. Despite of the ongoing political conflict in the country and the massive property destruction in 2004 due to the Tsunami, Sri Lanka’s economy has been continuing to grow over the last few years. Gross Domestic Product (GDP) has risen from 5.8% in 2005 to nearly 7% in 2006. The rise in output was stimulated stimulated by a strong agricultural recovery and booming services sector. Sri Lanka noted a per capita income of US $1,197 in 2005, which was higher than most of its South Asian neighbours. However with appropriate steady policies even double-digit growth rates could be attained. Sri Lanka could potentially benefit more from the positive economic prospects and developments in the (south-eastern) Asian region, as institutions in Sri Lanka have the intrinsic capacity to implement a solid macro-economic policy, supporting the development of a market economy.

Two factors have contributed to a relatively slow growth in Sri Lanka, especially when compared to other Asian countries; the 20-year conflict that erupted in 1983 and the substantial involvement of government in the economy. The government has a strong role in several key sectors of the economy. Although the private sector appears to be growing, the state is still heavily present in power, transport, banking, agricultural inputs and labor. Besides this, corruption has increased and so did bureaucracy. Apart from being not very cost effective there is a poor decision making practices of government entities (62 cabinet ministers and 20 additional ministers).

Economic growth is characterized by regional disparities. Income in the Liberation of Tamil Tigers Eelam (LTTE) held areas and in poorer pockets in the south is approx. US$ 400 per capita, whereas the per capita income in the Western province is around US$ 1300. In terms of the height and growth of real GDP and of income per capita compared to other developing countries with which the Netherlands has a long-term structured development relationship (the so-called 19+ countries) the Sri Lanka economy is doing relatively well, although pertinent bottlenecks, such as the energy supply, infrastructure and bureaucratic procedures are persistent. The target for government revenue voor 2007 has been set high, at 18,5% of GDP. The government of Sri Lanka (GOSL) expects to derive revenues from direct and indirect taxes to reduce this deficit, and is optimistic about the collection of revenues in the budget, though it most likely underestimates the expenditure. It is expected that the fiscal deficit will reach 7,9% of GDP in 2006 due to large overruns e.g. in oils subsidies and inflation is projected to remain high at around 14% nationwide with rapid rates of credit expansion and rising oil prices. The GOSL implemented some policy recommendations to improve the tax administration and as a result the revenue collection. A Revenue Board was established to coordinate the actions of the three tax collecting offices. It furthermore broadened the tax base and imposed an income tax on the wages of civil servants which were exempted from tax before. At the moment the tax administration offices are working on the improvement of revenue collection by reorganizing the tax administration and enhancing and implementing new processes within these organizations.

Sri Lanka has introduced a range of new taxes and increased others e.g. on luxury consumer goods. The 2007 budget increased corporate and personal taxes and other indirect taxes. These taxes are in addition to a new import fee on a range of consumer goods and non-essential items introduced in 2004. An economic service charge tax, ranging from 0.25 % to 1 % of turnover depending on the type of business, applies to all companies with turnover exceeding $ 500.000, including those currently benefiting from tax holidays. Companies already paying income tax will be able to offset the new tax against their income taxes. Nevertheless, for some companies, especially foreign investors which enjoy tax holidays it will be an extra financial burden. Tax holidays have been offered to industries that set up outside the Colombo and Gampaha Districts in the Western Province in addition to tax holidays and other incentives already offered to investors by the Board of Investment (BOI) of Sri Lanka.

The sectorial composition of the economy has changed from that of an agriculture based economy to one dominated by the services sector. Agriculture contributes 15.2%, industry sector nearly 27% to GDP and the services sector with highest contribution to GDP of 58%. Particularly a rebound in agriculture, which was depressed in 2005 as a result of the tsunami, appeared to be a strong component in the economic growth of Sri Lanka in 2006. The downside is though that the country has a persistent balance of trade problem, making it dependent on large amounts of foreign aid. While the economy continues to grow, inflation and a depreciating currency are deteriorating purchasing power. So far the rupee has weakend, in response to a rapid deterioration in Sri Lanka’s political and security climate and to increased demand for dollars as a result of rising imports. Besides this the increase in the fiscal deficit has also applied downward pressure on the rupee.

A general overview of the change in the key economic indicators in Sri Lanka over the last 15 years can be found in the following table:

Table 1: Key Economic Indicators of Sri Lanka

	1990	2000	2005
OUTPUT
Per capita GDP at market prices (US$) (b)	473	899	1,197
Per capita GNP market prices (US$) (b)	469	881	1,188
REAL OUTPUT (percentage change)
GNP	6.2	5.8	5.5
GDP	6.4	6.0	6.0
Sectoral Classification of GDP
Agriculture	8.5	1.8	1.5
Industry	7.8	7.5	8.3
Services	4.2	7.0	6.4
AGGREGATE DEMAND AND SAVING (Percent of GDP)
Consumption	85.3	82.6	82.8
Private	75.9	72.1	74.6
Government	9.4	10.5	8.2
Investment	22.2	28.0	26.5
Government	4.2	3.3	4.2
Public corporations	4.2	3.3	2.7
Private	13.8	21.5	19.6
Domestic savings	14.3	17.4	17.2
Net factor income	2.5	4.0	6.1
National savings	16.8	21.5	23.3
PRICES AND WAGES (percentage change)
Colombo Consumers’ Price Index	21.5	6.2	11.6
GDP Deflator	20.0	6.7	10.1
EXTERNAL TRADE (percentage change) (e)
Terms of trade	-12.5	-6.1	-4.2
Export volume	29.7	18.3	6.7
Import volume	7.6	12.9	2.7
GOVERNMENT FINANCE (percentage of GDP)
Revenue	21.1	16.8	16.1
Expenditure	22.3	23.5	14.2
Overall deficit	-9.9	-9.9	-8.7
Government Debt	96.5	96.9	93.9
EXCHANGE RATES -Annual average
Rs./US$	40.06	75.78	100.50

Source: Central Bank of Sri Lanka
A more thorough overview of Sri Lanka’s key economic and social indicators
can be found in Appendix 1.

The country's economy has always been primarily agricultural, with an emphasis is on plantation grown export crops such as tea, rubber, and coconut. Cocoa, coffee, cinnamon, cardamom, pepper, cloves, nutmeg, citronella, and tobacco are also exported. Rice, fruit, and vegetables are grown for local consumption. Sri Lanka is also an exporter of formless graphite, which is its principal mineral industry. Besides this large production of agricultural products though, Sri Lanka’s textiles and garments industry has be growing steadily over the years and has now become its biggest export factor. Petroleum refining is also important industry for the country, and furthermore precious and semiprecious gems, mineral sands, clays, and lime stones are mined. Finally a great variety of consumer goods are manufactured as well. So while tea and rubber are still important, Sri Lanka's most dynamic sectors now are food processing, textiles and apparel, food and beverages, telecommunications, and insurance and banking The composition of Sri Lanka’s exports is thus dominated by industrial exports followed by agricultural and mineral exports. The United States, India, and the United Kingdom are the largest export trading partners.

On the import side of the trade balance Sri Lanka’s main imports are textile fabrics, mineral products, petroleum, foodstuffs, machinery, and transportation equipment. In terms of the direction of trade, Asian countries are the main origin of imports, with India as Sri Lanka’s largest source of imports followed by Singapore, Hong Kong and China. The market share of Asian countries increased from 57 percent in 2004 to 60 percent in 2005.

Sri Lanka’s external sector showed considerable growth in 2005. Imports grew by 10.8 percent to US$ 8,863 million reflecting higher import prices and increased demand in all three categories of intermediate, investment and consumer goods. Intermediate goods accounted for 60% of total imports to Sri Lanka followed by Investment goods (21%) and Consumer goods (19%). The share of consumer goods imported declined to 19% in 2005 from 20 percent in 2004, while the share of intermediate and investment goods increased owing to growing investment and production activities in the country. Of Intermediate goods, petroleum products and fabrics for textiles account for 36 percent of overall imports. The growth in investment goods especially in 2005 is driven mainly by higher imports of building material and transport equipment.

Both imports and exports expanded further in March 2006 with imports growing at a faster rate mainly due to the increase in the petroleum. Imports of fabrics in the first three months have also increased indicating future growth in exports of garments. Due to the higher imports though, the trade deficit has increased during this period. The impact of the widening merchandise trade deficit is mitigated to a large extent by net inflows of private remittances. They provide crucial support to Sri Lanka’s balance of payment. The last two years remittances contribution was relatively high 8-9% to GDP due to the tsunami. It is expected that this might become “normal” again to 6-7% contribution to GDP in the coming years.

Following figures, international trade in 2006 also been expanded on both import and export fronts, which can be seen table 2.

Table 2: External Trade Performance – June 2006 and January-June 2006

Category	June 2005  US$ mln	June 2006 US$ mln	Growth June %	Jan-June 2005 US$ mln	Jan-June 2006 US$ mln	Growth Jan-June %
Exports o/w:	514.0	631.8	22.9	2,906.4	3,161.8	8.8
Agricultural	96.0	113.7	18.3	526.8	606.4	15.10
o/w tea	67.9	79.7	17.4	374.7	424.0	13.2
Industrial	406.8	507.9	24.8	2,249.0	2,468.0	9.7
o/w textiles & garments	245.2	277.8	13.2	1,325.9	1,379.7	4.0
Mineral	7.1	7.2	0.5	73.0	68.4	-6.3
Imports o/w:	814.8	939.6	15.3	4,117.7	4,955.1	20.3
Consumer goods	146.0	161.0	10.2	821.5	913.4	11.1
Intermediate goods	523.3	578.3	10.5	2,437.9	2,915.8	19.6
o/w petroleum	203.6	217.6	6.8	736.9	1,039.3	41.0
Investment goods	142.1	196.2	38.0	838.0	1,085.3	29.5
Balance of Trade	-300.7	-307.8	-2.3	-1,211.3	-1,793.3	-48.0

Source: Central Bank of Sri Lanka, Monthly Bulletin, August 2006

1.2.1 Budgetary policy
The government’s fiscal control deteriorated in 2005-2006. The new government attempted to rein in the fiscal deficit by revising petroleum prices upwards, and removing a costly subsidy on wheat flour; these moves where however insufficient to offset rising import prices. The economic growth remained broadly on trend in 2006 with a GDP of 7%. Defense expenditure will put a lot of pressure on the budget (23%) as the security situation deteriorates further. A downward movement of the economy however accelerated in the second halve of 2006. There has been a sharp rising of inflation, with even 19% in Colombo in November, a slowdown in capital inflows and a rise in debt service burden. It is expected that the fiscal deficit will reach 7,9% of GDP in 2006 (from an estimate of 7.4% of GDP in 2005) due to large overruns in oil subsidies, wage and pensions bill, and additionally security and humanitarian spending. The total government revenue (17,8%) grew due to tax revenue, as measures introduced in the 2006 budget came into effect, but is still not sufficient to fill the gap. Much of the improvement in taxation inflows derived from increase in excise taxes. In 2006 all subsidies on fuel except for kerosine were eliminated by June 2006 which will bring down the subsidy costs with 50% in 2006 and it is expected to even lower levels at 2007. Subsidies on loss making state enterprises however still put a lot of pressure on the budget and so does the defense expenditure (23% of GDP). The government of Sri Lanka is responsible for losses which arise from these companies while there is no clear view of the contingent liabilities.

The budget focusses on economic growth through sunstantially increased public investment, reducing poverty through regional development and strengthening SME’s. Again there will be expansion of employment and wages in the public sector, and improvement of infrastructure plays an important role.
The GOSL has to cope with a civil service of 1 million civil servants on a total population of 19 million people. This results in inefficiencies in the service delivery, cascading mandates and a major part of the budget spend on recurrent costs. Reform of this civil service is definitely needed to improve the service delivery. Nevertheless in 2006 the public sector employment again expanded by about 5% in an effort to stop unemployment. Furthermore the Central Bank of Sri Lanka emphasizes that the growth of the economy is threatened by external factors like the continuous escalation of oil prices, a slowing down of the world economy and increasing competitiveness in the garment industry due to the expiration of the Multi Fiber Agreement.

Chapter 2 - Sri Lanka as a business partner

2.1 Introduction
2.2 Sri Lanka in Ratings
2.3 Business culture
2.4 Business customs
2.5 Trade agreements

2.1 Introduction
When studying a country such as Sri Lanka one can not dismiss the fact that it is a country with much potential. In the Economist Intelligence Unit's (EIU) 2006 country forecast, Sri Lanka's overall score in the business environment rankings improved from 4,99 for the historical period (1997-2001) to 6,03 for the forecast period (2002-2006). The country’s geographical location also adds highly to the country’s possibilities as it is situated in a region of high growth, with the booming economies of India and China only next door. Following this it has been continuously improving its economic relations within and between the region and also with the EU over the past years.

Despite the previous factors though the country has not yet seemed able to grasp its full potential, with many economical beneficiating projects remaining unfinished and a political situation that continues to be unstable. Following this one thing that can be seen is that long-term planning appears to be very difficult in this country. Various reasons are given for this, with main and foremost: the war. The war between the Government and the LTTE is seen by many businessmen as a liability standing in the way of economic development, as the insecure situation frightens off foreign investors. Furthermore, as the bigger part of the governmental budget is spend on the military, more structural and much needed improvements, such as to the country’s infrastructure, remain neatly thought out, but still on the shelves. Another reason given is that the government does not seem to have a very business friendly attitude. Even with incentives and BOI facilitation, foreign investors face difficulties operating in this country. Difficulties range from the routine but critical matter of clearing equipment and supplies through customs speedily, to obtaining a factory site. Legal challenges to environmentally sensitive projects have been particularly challenging, even when objections are unfounded. Perhaps the most difficult barriers to investment are the enormous set of bureaucratic requirements and poor decision practices of government entities. The major uncertainty is regarding how the country’s investment climate would gear itself into being attractive to investors so that the industrial base could grow. There seems to be a huge gap between word and action in the government’s business policy. A third motivation given to the fact that long-term planning is difficult in Sri Lanka is the problem of corruption. This will be dealt with more specifically further on in this document.

2.2 Sri Lanka in Ratings
In the 2006 ‘failed states’ index, prepared by the Washington-based Fund for Peace and Foreign Policy magazine, Sri Lanka has been listed in the ‘in danger’ category. This index defines a ‘failed state’ as one in which the government does not have effective control of its territory, is not perceived as legitimate by a significant portion of its population, does not provide domestic security or basic public services to its citizens, and lacks a monopoly on the use of force. Altogether it thus shows the degree in which a country is able to implement its own policies. All these factors highlighted in this definition exist in one form or another in Sri Lanka. The country ranks number 25 on a list of 146 countries and scores especially high on 3 indexes, namely: ‘legacy of vengeance; seeking group grievance’, ‘rise of factionalized elites’ and ‘criminalization or de-legitimization of the state’. This last factor encompasses the amount of corruption in a state, showing that this is a problem in Sri Lanka. The Corruption Perception Index (CPI) of Transparency International also has Sri Lanka quite high on its list. The country ranks 84 out of 163 countries with a CPI of 3.1 out of 10. However, even though this listing is quite high, Sri Lanka still has a better rating than its South Asian counterparts Bangladesh and Pakistan (156 and 142) and is only just outrun by India, which is ranked at place 70. In a country profile made by the UNDP a more positive ranking of Sri Lanka can be found; its literacy rate. Sri Lanka is ranked 54 out of 177 countries, with a literacy rate of 90,7% of the population. This concerns the population over the age of 15. Its high literacy rate places the nation way ahead of other South Asian nations & on par with those of South East Asia.

2.3 Business culture 
The government of Sri Lanka has problems creating and also implementing a sound overall policy in their country. In the previous sub-chapter this is underlined by the various ratings the country receives, but it is also a much mentioned fact by the Sri Lankan business community. Some examples given by interviewees are the following: The state of the infrastructure is very bad; roads are full of holes and very busy and the train network is no very adequate to use for business purposes. Although the government has repeatedly promised to enhance it, very little has happened so far. Concerning taxes many complaints has also been made; on the one hand quite an amount of taxes are charged and expected to be paid on time. On the other hand though, the governmental tax institution ‘Inland Revenue’ is much behind on its VAT returns to companies, leaving many companies still to receive large sums of money. A third and often mentioned fact is the high cost of land and energy. The government’s policy at the moment is to generally only lease out land to companies, not sell it. A private person though can by land, as residences are private. However the tax that a foreigner has to pay over this land is 100%. Furthermore the cost of energy is very high and out of proportion to other standard costs incurred in the country, creating a highly felt constraint in many a business. Overall the main critique is that there is a huge cap between the ‘words’ and ‘actions’ of the government as far as the treatment of country’s business sector is concerned. Despite all these critical points and the ongoing security problems in the country, it is important to note that Sri Lanka’s economy has been steadily growing over the past years. As mentioned before in the first chapter, GDP and even in- and exports have seen continuous growth. This steady augmentation is first and foremost attributable to the private sector of Sri Lanka.

The Private Sector
Sri Lanka’s economy is mainly driven by a strong private sector with a huge commitment to the country. The private sector consists of a small number of large conglomerates and many small firms. The main drive behind the economy is the small number of large firms. There are about 15 to 20 large companies running the market in Sri Lanka, all highly diversified due to the small size of the market in the country, and at the same time are also highly integrated, doing making business fuinctions themselves. The following companies, in arbitrary order, are among these top 15-20: John Keells Holdings, Aitken Spence, Colombo Fort Land, Hayleys, Hemas, Louis Brown & co., Richard Pieris, Ceylinco cons., Brandix, MAS Holdings, Mackwoods Group, Stassen Group and MJF Group. These firms are genuinely old, reputable firms, often established and still run by respected families. These families and businessmen are very committed to their country, not purely undertaking business for the money, but also with dedication to a sound construction of their homeland. Within the business market of these firms everyone knows each other. Therefore to undertake business in a successful, efficient manner, one would have to be introduced into the business community by a member of the established order. Another characteristic of this business society is its so-called ‘English Club’ culture. Most probably due to the English heritage in the country most socialization and with it business, happens on golf courses, at the Hilton or in private clubs, of which one can normally only become a member, again, through introduction. Some examples of these clubs and its members are: the Hill club in Nuwara Eliya, the Swimming club on Galle rd, the Rotary, the Lions, the Round Table etc. This cultural overview underlines the fact that having goods contacts in Sri Lanka is very important when doing business.

2.4 Business customs 
As in many a country, Sri Lanka too has certain business customs worth knowing upfront. Some of these are the following: One of the main ways in initiating and undertaking business in Sri Lanka is through personal contacts: Sri Lankans like to know their business partners well, before they enter into any transactions. For official visits, the style of clothing should be a shirt tucked into the trousers and a tie. Suits (mainly the jacket) are not worn on a daily basis except for very important meetings. Usually, appointments are necessary for meetings and it is nice to be punctual. However, most meetings do not start at the scheduled time. Shaking hands is a normal form of greeting, though always do this with the right hand, as the left hand is seen as unclean. Furthermore, generally business cards are exchanged already during the first meeting. Courtesy is highly valued in Sri Lanka, and personal graciousness plays a major role in clinching deals. Finally due to the bureaucracy, business decisions are made slowly in the public sector organizations. For more specific customs and tips in doing business, one can consult the following publications: ‘Succeed in business: Sri Lanka’, by Douglas Bullis ( www.powells.com) 
‘Doing business in Sri Lanka’ ( www.worldbiz.com/index.php/cPath/119)

2.5 Trade agreements 
Despite its actions, sometimes unsupportive of the local business players, the Sri Lankan government has generally shown positive action in its external business market. The country has a number of international trade agreements already in operation and some others that are still under negotiation. The former will be dealt with below.

Sri Lanka and India
The Indo Sri Lanka Free Trade Agreement (ISFTA) was signed on the 28th of December 1998, and has been in operation from March 2000. The objective of the establishment of the ISFTA with India was to create a common economic space for the free movement of goods between the two countries. Under this preferential Trade agreement, most products manufactured in Sri Lanka with at least 35 percent domestic value addition (if raw materials are imported from India, domestic value addition required is only 25 percent), qualify for duty free entry to the Indian market. Tariff concessions for Sri Lankan products include zero tariffs on 4,150 items; 50 to 75 percent reduction for tea and garments under quota; 25 percent reduction for 528 items, and no reduction for 429 items (negative list). Discussions are underway to reduce the negative lists of both countries.
Following the implementation of the ISFTA, bilateral trade has increased tremendously. Negotiations are now being undertaken concerning a Comprehensive Economic Partnership Agreement (CEPA) between Sri Lanka and India in order further deepen concessions on trade in goods and services, promote investment flows, and enhance economic corporation in areas such as transportation, infrastructure and information and communication technology. India’s requests to Sri Lanka relate, among others, to liberalization of financial services, professional services, computer services, construction services, tourism and travel related services and maritime transport services. In most of these sectors Sri Lanka has already fully liberalized unilaterally, with the notable exception of mode 4 (movement of natural persons). Sri Lanka’s main requests to India relate to liberalization of air services, financial services, maritime transport services, retail services and tourism. In addition, a subgroup on the avoidance of double taxation and fiscal evasion is working on a stand along agreement, which, under the broader realm of CEPA, will promote and facilitate more economic activities between the two countries.

Sri Lanka and Pakistan
Sri Lanka has also signed a free trade agreement with Pakistan. This Pakistan Sri Lanka Free Trade Agreement (SLPKFTA) was signed in February 2005 and came into operation on June 12, 2005. Under this agreement Pakistan has offered duty free entry to 206 items, while Sri Lanka has Sri Lanka has provided duty free acces to 102 products form Pakistan. Pakistan’s negative list contains 541 items with no duty concessions. This agreement allowed Sri Lanka to complete the tariff phasing out on agreed product categories n 5 years whereas Pakistan will phase out tariffs on the balance of about 4.000 items in three years from 2005.

The Sri Lankan Board of Investment (the BOI) has picked several products sectors for promotion under the agreements, and targets its investment promotion efforts to countries and companies manufacturing them. The selected products, if manufactured in Sri Lanka and meet rules of origin criteria, are eligible for duty free entry into India. The products targeted for Pakistan will qualify for a 34 percent duty reduction immediately and will see duties coming down to zero over three years. The following sectors have been identified for investment promotion:
ILFTA: confectionary and cocoa products, rubber products, plastic, footwear, ceramic, jewelry, machinery and mechanical appliances, electronics and electrical products, automobiles and spare parts, medical instruments and furniture and doors.
SLPKFTA: rubber products, ceramic, machinery and mechanical appliances, electronics and electrical appliances, medical instruments and automobiles and spare parts.

Sri Lanka and Asia
Sri Lanka agreed to the South Asia Free Trade Agreement (SAFTA), an accord between the seven South Asia countries that form the South Asian Association for Regional Cooperation (SAARC): Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Concerning this agreement, SAFTA is built upon four pillars: establishing rules of origin criteria, accepting negative lists, agreeing on a mechanism for compensation of revenue loss for least developed countries (LDCs) and finally, establishing technical assistance to needy countries. It offers regionalized tariff reductions for imports from the SAARC member countries. Stated goals are to reduce duties for imports from member countries to between zero and 5 percent over a period of 7-10 years. Pakistan and India are to complete implementation by 2012, Sri Lanka by 2013 and Bangladesh, Bhutan, Maldives and Nepal by 2015. It replaces the earlier South Asia Preferential Trade Agreement (SAPTA) and may eventually lead to a full-fledged South Asia Economic Union. The first-phase of tariff reduction under SAFTA was to be implemented on 1 July 2006, and the goal is that the SAFTA will become fully operational with the intra-regional tariff of non-negative list items reaching 1-5 per cent by 2016. Under the Trade Liberalization Program scheduled for completion in ten years by 2016, the customs duties on products from the region will be progressively reduced. However, under an early harvest program for the Least Developed Member States, India, Pakistan and Sri Lanka are to bring down their customs duties to 0-5 % by 1 January 2009 for the products from such Member States. The Least Developed Member States are expected to benefit from additional measures under the special and differential treatment accorded to them under the Agreement. These agreements are seen as steps towards making Sri Lanka a regional hub and a gateway to South Asia and the Middle East, for foreign investors.

Sri Lanka and the EU
The central pillar of the multilateral rule-based trading system enshrined in the GATT/WTO is the acceptance and operation of the Most Favored Nation (MFN) principle. This means that every member of GATT/WTO should invariably accord the same, identical, equal and non-discriminatory treatment to all imports irrespective of the countries of origin. However, the Generalized System of Preferences (GSP) is an officially agreed exception to the MFN principle which was proposed at the first meeting of the United Nation Conference on Trade and Development (UNCTAD) with a view to assisting the developing countries in their exports and development efforts. The European Community was the first to implement their GSP scheme in 1971. Until 1995 the main features of the EC GSP Scheme were quotas and ceiling for individual countries and products. Since 1995, the EU’s GSP did away with any quantitative limitations. In April 2005 a new simplified GSP scheme was proposed in the EU providing for, among others, special incentives (better GSP rates of duty) for beneficiary countries which can demonstrate good governance and advances in sustainable development. These special incentives were also known as GSP+. The European Commission issued a press release in December 2005 indicating that this GSP+ scheme and with it preferential treatment, such as duty and quota-free access, had been granted for exports from 15 vulnerable developing countries including Sri Lanka. This scheme came into force effectively on the first of January 2006 for a 3 year period ending the 31st of December, 2008. Under this program, 7,200 Sri Lankan products meeting rules-of-origin criteria can enter the EU duty free.
The Rules of Origin (RoO) criteria are the following:
- The products have to originate in beneficiary countries according to EU GSP RoO.
- There has to be proof of originating status (Being: goods are entirely produced in the beneficiary country or products manufactured from inputs from other countries)
- Goods must be transported direct from the beneficiary country to the EU. (Transportation via third country is only acceptable under restricted conditions and special circumstances)
The delegation to the European Commission in Sri Lanka has stated that the GSP+ will be revised in 2007 due to its complicity. The agreement itself though will remain intact until the end of 2008.
More information on these amendments can be obtained by contacting
the Delegation to the European Commission in Sri Lanka
26 Sir Marcus Fernando Mw
Colombo 7
Sri Lanka
2674413-4
 www.dellka.ec.europa.eu

Further information on all Sri Lanka’s trade agreements is further posted on
the website of the Department of Commerce; http://www.doc.gov.lk.
For further information the Department itself can also be contacted:
Department of Commerce 4th Floor,
Insurance Building
Vauxhall Street
Colombo 02,
Sri Lanka
Tel: 0094 11 2329733
Fax: 0094 11 2430233

Conclusions to Trade Relations
The various trade agreements mentioned above can be seen as strategic agreements facilitating interregional relations between Sri Lanka and some of its business partners. The experience of the Indo-Sri Lanka Bilateral Free Trade Agreement (ISFTA) is a good example of the benefits of such a FTA. This Agreement has actually led to a reduction in Sri Lanka's trade deficit with India from 11:1 in 1999 to 5:1 in 2002. In 1999 Sri Lankan exports to India accounted for one per cent of overall exports, whereas this amounted to 8.95% in 2005 and over the first half of 2006 even to 29.53%. With these numbers India had become the 3rd largest export destination of Sri Lanka in 2005, compared to a rank in the 20s during the 1990s. Meanwhile, India has become the largest source of imports to Sri Lanka, accounting for 17.3 per cent of overall imports in 2005. With the planned extension of this agreement into a CEPA, the market will be opened up even more, with the new rules also facilitating the trade in services between the two countries. For a foreign manufacturer an agreement such as the ISFTA could be of great importance in the fact that goods could be produced in Sri Lanka using cheap inputs from India or Pakistan, imported under the trade agreements. New business opportunities for foreign investors appear also due to the fact that the Sri Lankan Board of Investment (BOI) has picked several product sectors for promotion under these two agreements. It thereby targets its investment promotion efforts to countries and companies manufacturing these selected products. Considering the GSP+ scheme of the EU, companies can benefit from duty free entry of their products into the EU, at least until the end of 2008. This rule accounts for 7200 products either entirely produced in Sri Lanka or through value addition to products manufactured from inputs from other countries. A producer from the Netherlands could then for instance use the advantage of Sri Lanka as a low wage country to manufacture its products, by using cheap inputs from other south Asian countries and then import them into the EU without having to pay any duties. The trade agreements are seen by the Sri Lankan government as steps towards making Sri Lanka a regional hub and a gateway to South Asia and the Middle East for foreign investors.

Chapter 3 - Selling Netherlands products and services

3.1 Introduction
3.2 Types of companies
3.3 Business options
3.4 Trade promotion and advertising
3.5 Role of government
3.6 Tender process
3.7 Chambers of Commerce
3.8 Addresses of importers
3.9 Funding

3.1 Introduction
Despite the high value and often world-wide recognition of the Netherlands product it has yet to find it stronghold in Sri Lanka. Even though the two countries have a joint heritage descending from the 17th century occupation of Sri Lanka by the Netherlands, in comparison to the English, not much of this past connection with the Netherlands can be seen in trade today. There are a number of Netherlands entrepreneurs currently running businesses in this country, but the Netherlands and its products do not have a place in the top 10 importing countries into Sri Lanka, as the following graph shows:

Top Ten Importing Countries into Sri Lanka for the period Jan - Dec 2005
Country of Origin	Value (Rs) M.	(US$) M.
India	144,726	1385
Singapore	74,169	710
Hong Kong	65,143	623
China	63,37	606
Iran	50,178	480
Japan	38,158	365
Malaysia	33,429	320
Taiwan	28,005	268
U.K.	27,309	261
Belgium	24,408	234
Total	548,895	5252

                  
The top 3 importing countries from the EU were the U.K, Belgium and Germany which accounted for 19.3%, 15.9% and 13.9% respectively of total imports from the EU, this being 3.27, 2.92% and 2.14% of total imports into Sri Lanka. Imports from the Netherlands accounted for 0.81 % of the total imports in 2005, which was an amount of €51.7 mln. As a source of imports to Sri Lanka, the Netherlands ranked at 26th in 2005. In 1990 though the Netherlands ranked 20th, while in 2000 it was listed at number 18, with imports amounting to €47.6 mln. This shows that by 2005 the despite the value of imports increasing, the importance of Netherlands as import sourcing destination declined. On the Sri Lankan export side the Netherlands was the 11th largest export destination for Sri Lankan produce in 2005. In this year the exports from Sri Lanka to the Netherlands amounted to was €75.5 mln. Exports were mainly in the miscellaneous manufactured sector of which clothing and clothing accessories accounted for 46.8%. Overall the total balance of trade between the Netherlands and Sri Lanka has been in the advantage of Sri Lanka over all years from 2001 to 2005. The average balance was €23 mln, the lowest figure being observed in 2001 with €5.4 mln. The highest peak was in 2004, with €40.5 mln.

3.2 Types of companies 
The Companies Act (No. 17 of 1982) contains the rules, procedures, accounting and reporting requirements for companies incorporated or registered in Sri Lanka. The registration of companies, filing of accounts and annual returns are done with the Registrar of Companies ( www.drc.gov.lk). According to this law one may establish the following types of companies in Sri Lanka:

Private Companies
A private company must consist of at least two and not more than fifty members. It must have at least one director. A private company cannot invite public subscription for its shares.

Public Companies
At least seven members are required to form a public company, though there is no upper limit. It must have at least two directors. Public companies may invite public subscriptions for their shares or debentures and other securities, and can also be listed on the stock exchange. They cannot commence business without a business commencement certificate.

Offshore Companies
A company registered within or outside Sri Lanka may register itself in Sri Lanka as an offshore company to carry on any business outside the shores of Sri Lanka. If a company registered outside Sri Lanka registers itself as an offshore company, it is deemed to have been incorporated in Sri Lanka. An offshore company cannot conduct any business in Sri Lanka

3.3 Business options 
3.3.1 Using an agent or distributor
Most exporters find using local distributors an easy first step for entering the Sri Lankan market. Most foreign firms select local agents on the basis of financial stability and technical capability. As the largest trading houses represent many (sometimes competing) foreign principals, medium and smaller firms are becoming more attractive. If products require stocking or servicing, however, large firms are often the better choice. Sales commissions paid to agents range from 5% to 20%, depending on sales volume and product price. Agency relationships can be terminated for inefficiency, misappropriation or inability to fulfill other conditions stipulated in the agency agreement. Carefulness as tothe appropriateness of a potential agent/distributor is thus essential prior to entering into the local market.

3.3.2 Establishing an office
Potential investors should first initiate discussions with the Board of Investment prior to establishing a company or a liaison office in Sri Lanka. A foreign entity must apply to register with the Registrar of Companies ( www.drc.gov.lk) in order to establish a company, a branch office or a liaison office in Sri Lanka. The application for registration should be accompanied by a certified copy of the charter, statute or memorandum and articles of association of the company; a certified copy of the incorporation of the company; a list of directors; names and addresses of company directors resident in Sri Lanka; a statement containing the full address of the registered or principal office of the company and principal place of business within Sri Lanka; and a valid power of attorney authenticated using the seal of the company authorizing the person or persons resident in Sri Lanka to act on behalf of the company. The registration fee is on average about €100; the fee varies according to the amount of issued share capital. A company may also be registered as an offshore company, in order to carry on business outside Sri Lanka

Liaison/Representative Offices
A company incorporated outside Sri Lanka may maintain its presence in Sri Lanka through a representative office, and is of similar status to that of a branch office. A liaison office can engage in market promotion activities, extend technical support and source raw materials and manufactured products. It is however, prohibited from engaging in any trading or investment activity or accruing any turnover in Sri Lanka. No tax incident arises since it is not permitted to trade. Therefore, the question of permanent establishment is not relevant.

Branch office
A company incorporated outside Sri Lanka may establish a place of business in Sri Lanka by registering a branch office with the Registrar of Companies. Applications for registration must be made within one month of establishing a place of business in Sri Lanka. Generally approval from the relevant line ministry would be required before the registration can be completed. The liability of a branch extends to its foreign assets. A branch office must file the statutory company documents (annual accounts, returns to be filed) as well as copies of accounting statements compiled under the company's country of origin. The registration fee for a branch office is about €100.

Subsidiaries
To establish a business in Sri Lanka foreign companies can incorporate a local subsidiary company. Following incorporation, a subsidiary in Sri Lanka must comply with all statutory requirements imposed on domestic companies. Furthermore franchising is seen, but it is not as common as agents/distributorships.

3.3.3 Joint Venture Company
A joint venture can be with other Sri Lankan companies or foreign entities. This kind of business may be incorporated or carried on as an unincorporated business similar to that of a partnership. Joint ventures have become popular in recent years; particularly in export oriented projects. They are eligible for the same preferences and tax benefits as domestic companies and there are no restrictions on foreign ownership, except for certain specified sectors.
The bigger part of the entrepreneurs from the Netherlands who are working in Sri Lanka are doing so through joint-ventures. From interviews held with these businessmen it is generally seen one of the best ways of undertaking business in Sri Lanka. As mentioned before the market is quite small and therefore it is important to have a manner in which to enter this market. That is where a Sri Lankan partner makes a difference. However, although the general perception has been positive, the Embassy has also been informed about less successful ventures of its national entrepreneurs. Such a futile undertaking, together with the very inefficient judicial process in Sri Lanka can provide many extensive problems to a foreigner. From these affairs it can thus once more be concluded that one should only embark on a joint-venture with a well-established, trustworthy partner. The Netherlands Embassy can provide information on various consultants who fro their part could aid in the process of finding a reliable business partner.

3.3.4 Direct marketing
Direct marketing usually takes place when a product is sold on a one-time or irregular basis. Companies with regional branches or representatives have successfully entered the market directly, but an agent is often necessary to penetrate the market. Companies venturing into direct marketing in the country will have a competitive price advantage, as agency fees/commissions will not be factored into the price.

3.4 Trade promotion and advertising 
The Sri Lankan business market is mainly centered in and around the Western Province and thus Colombo. The market in this country is quite small, and is composed of a small number of large firms and many small and medium sized enterprises. The large firms are mostly highly diversified, with operations extending into a large number of different sectors. These companies are often family owned firms of old and their diversification is mainly due to the small size of the market in Sri Lanka. The small and medium sized enterprises range from little one-man businesses to larger more structured firms.

3.4.1 Foreign companies
Making the first contact After a foreign company has decided to make a move into the Sri Lankan market, the next step is to promote and market one’s product by first of all creating an awareness of the new product in this foreign market. To make one’s product known in Sri Lanka and provide for a first contact point between the foreign company and possible local buyers, a company can undertake a number of strategies: To reach the large diversified organizations for example it is first of all important to have a key contact within this company. This person can then facilitate one’s entrance into a company. A strategy mentioned by some of these large firms as to enhance the awareness of the Netherlands product could be to hold a product specific presentation for the Board of this firm. This was mentioned to be viewed as an efficient and straightforward manner to promote one’s merchandise. Another way mentioned to get a so-called foot in the door at these companies could be for the foreign company to target the local company’s principle overseas players, thus the suppliers and such. More general information on the specifics for initiating business can also be achieved by contacting the Sri Lankan (trade) missions abroad, if present of course and the Chambers of Commerce in Colombo. To promote the Netherlands product to a larger public some of the following strategies can be used: Sector specific representatives could come to Sri Lanka to visit trade fairs on general trade or even on specific sectors. An active part could be played in these fairs as they could hold product exhibitions or seminars. Trade fairs have proven a good access point for Sri Lankan entrepreneurs with interest in Europe. Many Sri Lankan business men have been visiting trade fairs in Europe for years; such as the Anuga fair on food (Germany) and some large tourism fairs held in France and Italy. The other way around would thus be worth trying. A final, but far more advanced manner to promote one’s business is in the form of trade missions.
Some examples are:
- Belgium for instance has regular trade missions coming into Sri Lanka, with the last one being in October 2006.
- The UK normally has one coming in 6 times a year (this is now reduced though, because of the war). For this they work closely together with the Chambers of Commerce.
Manners used to exert these missions are:
- Renting a room where tables are lined up with the various sector specific companies sitting there. The other party then comes and joins the table for about half an hour to talk business before moving on to the next tables.
- Taking a whole week; which begins with a network meeting and then follows with various sector / business related meetings happening throughout the week.
As a trade mission usually is only undertaken from a national perspective and thus in close cooperation with the government, it is definitely not the first step to be used in promoting a product.
Generally advertising and participation in sales promotions and other trade events are often helpful for raising consumer awareness and gaining market share, but effectiveness will vary according to product.

Initiating a business
When the potential and market possibilities have been assessed in Sri Lanka the next step can be to set up a business. A research conducted among a number of 70 firms currently operating in Sri Lanka on means for initiating business in Sri Lanka, showed personal contacts and the Internet are the top 2 methods used to initiate business.

- Personal Contacts - Direct business to business Contacts - Using Internet Often - Through Local Agents - Direct Marketing - Through other Importers / Exporters - Through trade chambers - Trade Exhibitions - Through Media - Government Organization - Inter Company Relations/contacts - Through supplier directory  - Through Parent Company - Through Clientele – word of mouth - Through Suppliers - Corporate Literature

Frequency used Less           often

These top two methods for undertaking business are underlined by various interviews conducted among Netherlands and Sri Lankan firms and their managers. They mentioned that it is especially important to have good personal contacts in a business environment such as Sri Lanka. As the market is quite small, it is thus difficult to find a solid place in this if one does not know the right people.

Distributions and sales channels
Once a business activity is established in Sri Lanka important things to take into account are the method of distribution of the product and more specific ways to continuously promote it.

International trade is centered in the capital city, with more than 90% of all imports and exports passing through the port of Colombo. While there are many small to medium importers, 20 to 30 relatively large firms handle the bulk of international traffic. Only a few importers control distribution networks elsewhere in the country; most simply wholesale directly to regional distributors or to retailers. The government’s role in trade and distribution has decreased a great deal due to severe financial constraints. The most popular methods of distributing ones goods as a foreigner among the Sri Lankan based companies is through the appointment of a sole agent who will take charge of domestic distribution. This was not only a conclusion to the research conducted among 70 Sri Lankan firms, but also a tip given by Sri Lankan managers. The latter mentioned that it is important for a foreign company to provide for a liaison officer in Sri Lanka, so the market has someone to refer to. Preferably then, this is a Sri Lankan national who knows the market and its players well.

Other methods mentioned, though by a smaller amount of companies, are distribution through:
- Direct sales
- Retail outlets (shops or showrooms)
- Service stations
- Regional sales offices
- Institutional sales

In distribution another important factor to definitely take into account is sales service & customer support. After sales service and customer support are important factors in selling in Sri Lanka: local companies with comprehensive support services have proved successful. One should take this into consideration when appointing an agent. Finally consumer education is also a vital selling factor.

The same study undertaken among the, over 70, Sri Lankan companies revealed more on the main selling factors and techniques of these firms. The biggest part uses media advertising like television, newspapers, and radio to promote their goods. Other methods mentioned as promotional tools: are promotional campaigns such as supermarket promotions and bargain sales, and outdoor advertising like hoardings, billboards and merchandising.

Media Advertisements  Promotional Campaigns like discounts Outdoor Advertising Demonstrations / Seminars Sponsorship of films, tele-dramas Competitions for Customers Internet & Email Incentive purchase schemes like guarantees Direct marketing

Most used     Least used

Advertising is becoming increasingly important as new private television and radio stations open and expand operations and programming. There are more than five radio stations (operating 22 channels), such as:
- Sri Lanka Broadcasting Corporation (SLBC) - state-owned, operates domestic services in Sinhala, Tamil and English, including widely-listened-to Commercial Service
- TNL Radio - private, English language,
Furthermore there are eight TV stations (operating eleven channels) some are run by the state, others by the private sector. Newspapers, radio and television all accept commercial advertising. There are several English language newspapers, as well as daily papers in Sinhala and Tamil. The main newspaper and publishing companies are the following:
- Daily News - state-owned, English-language daily
- The Island - private, English-language daily
- Daily Mirror - private, English-language daily
- Dinamina - state-owned, Sinhala daily
- Lankadeepa - private, Sinhala daily
- Lakbima - private, Sinhala daily
- Uthayan - private, Tamil daily
- Virakesari - private, Tamil daily
The main business magazines are:
- LMD Magazine (Lanka Monthly Digest)
- Benchmark magazine
- Business Today
Trade exhibitions and fairs are limited. The different Chambers of Commerce sometimes sponsor trade fairs.

3.4.2 Sri Lankan companies
Undertaking business has two sides to the coin and thus as a foreign entrepreneur it is also important to have some knowledge on the Sri Lankan companies business manners.

Collecting Information
Interviews have been held with various large Sri Lankan firms and as an answer to the question how they got their information on suppliers or new contacts to help in their decision making process, the following answers were given: Internally many firms utilize the following means:
- Consulting own existing contacts, thus through the company’s existing knowledge base.
- Marketing departments within companies keep an eye on new trends and such.
- Constant reviews are made by marketing staff in the field
External means are also exploited:
- Various publications issued by Chambers of Commerce in Sri Lanka are consulted.
- Periodically research companies are used to do market research.
- Banks are also used to confer with on possible suppliers / buyers and their financial status.

Again the factor of contacts comes into the picture, as the first thing many a company does when seeking new product information is to consult their existing knowledge base. It is thus important for a foreign firm to have a place on this ‘existing contacts’ list.

Selecting a new partner
After collecting the specific information a client then still has to be selected; there are various ways for doing this, some of which are mentioned below. A more officially manner for deciding on a new supplier and which is often employed by large firms and especially the government is through calls for tenders. For large firms goods and services are often procured either from their already established principals or from generic suppliers. All governmental tenders are official and open to all bidders (although the outcome of these tenders does sometimes raise questions about its sincerity). A little more on tenders is mentioned further on in this chapter. Other means stated for acquiring new suppliers are through vendor-rating and through a preferential suppliers list.
Important factors that then often influence the selection and thus are taken into account are:
- The reputation of supplier
- The financial situation of a supplier
- The quality of product/service
- Supply or delivery manner
- Price

For the Sri Lankan firm as well as the foreign firm potential partners can be checked according to their financial results. Publicly listed companies in Sri Lankan are required to publish audited financial results, which can be checked prior to entering into business agreements. Stock brokers also publish corporate evaluations for publicly listed companies.

For major deals, business consultancy firms and law firms can perform due diligence. In smaller transactions, letters of credit are a standard requirement of potential customers, while bank references and track records can be checked prior to appointing agents.

Three key issues for Netherlands companies in the whole process of decision making by the Sri Lankan firms would be first of all to ensure that one’s company is found in the need identification, then to ensure to be evaluated in the ‘identifying suppliers’ process and finally to get access to the Decision Maker in the final decision making stage.

The government has a strong role in several key sectors of the economy. Although the private sector appears to be growing, the state is still heavily present in power, transport, banking, agricultural inputs and labor. Many government purchases are made by public tenders, which are usually advertised in the local media.

Details of Tenders are published in local newspapers and on the website of the National Procurement Agency providing sufficient time for the bidding companies to obtain further details regarding tender procedures and relevant application forms. Tender procedures are not fully transparent though, and delays are common. Well-informed local agents can be key to winning these tenders, though even the most connected local firms have trouble navigating the labyrinth of the government tender process. It is not uncommon for tender specifications to be drawn up to suit a particular company’s product. It is common belief that corruption plays a role in the selection process. The web site managed by the National Procurement Agency, or the Tender Board, with information on most government tenders is

 www.npa.gov.lk

Industry specific tenders Industry specific tenders can be placed on a number of websites and in various national newspapers. There is no general database with the when and whereabouts of all these tenders though, as it is too specific. Many a business person in Sri Lanka therefore advises to have a trade agent or related person based in Sri Lanka, focused solely on finding sector or product specific tenders, this as it is supposed to be quite a time consuming job. Local agents though often represent more than one foreign supplier so that when they encounter difficulties, including charges of possible corruption, they are reluctant to voice concerns fearing it will jeopardize other business interests. It can sometimes be difficult to get an objective appraisal from local agents, so make sure to get a trustworthy person. The main newspaper and publishing companies can be found in the media overview in chapter 6.

There are three main Chambers of Commerce in Sri Lanka, each with the goal to facilitate trade. These are the Ceylon Chambers of Commerce (CCC) which incorporates most of the large companies, but also focuses on the small and medium enterprises (SMEs), the Federation of Chambers (FCCISL), which focuses mainly on micro enterprises and finally the National Chambers (NCCSL) which has mostly SMEs as its members. Furthermore there are many small industry specific chambers and trade offices. The different chambers of commerce can be of help to foreigners willing to do business in Sri Lanka. They often have large databases of information which they can provide, such as on locating a manufacturer or supplier of a relevant product or to help clarify a business query, such as trade regulations and economic or statistical information. Some other features with which these institution can aid with are:

- Introduction to potential local importers

- Publicity through weekly trade bulletins highlighting products exporters from the Netherlands wish to export to Sri Lanka

- The Chambers could organize Buyer

- Seller matchmaking events

- Opportunities can be created to display products at

Trade Fairs / Exhibitions organized by the Chambers of Commerce.
The websites of the three main Chambers are:
 www.chamber.lk (CCC)
 www.fccisl.org  
 www.nccsl.lk  

See lists CCC & NCCSL

Funds provided through multilateral agencies have been the major source of term lending for government projects in Sri Lanka. The Asian Development Bank (ADB), the World Bank (WB) and Japan Bank for International Cooperation (JBIC) are the major sources of project financing. The International Finance Corporation (IFC) also supports private sector projects in Sri Lanka in the form of equity and long-term debt financing. In addition, bilateral donors also fund major projects by providing long-term concession loans. In June 2004 during a conference, Sri Lanka’s major aid donors pledged US$4.5 billion in loans and grants to Sri Lanka over a period of four years. Proposed areas of development include higher education, financial institutions and trading, port development, housing construction, road construction, and telecom and IT development. The ‘Tokyo Declaration on Reconstruction and Development of Sri Lanka’, drafted at the end of the conference, was partially contingent on the successful mediation of the peace process, and 30% of the funds were set aside for the north and east of the country. These funds were to be channeled through the North East Reconstruction Fund administered by the World Bank. Since much of the proposed funding is subject to the improvement of the security situation, the bulk of funds have not been released. The ADB is a non-profit international financial institution headquartered in Manila, Philippines and maintains a Resident Mission in Sri Lanka. In addition to public sector lending, the ADB also lends directly to the private sector tin order to mobilize additional investment and financing for projects. The ADB’s lending program provides significant commercial opportunities for companies from the Netherlands.

The U.S. and Japan are the largest shareholders of the ADB In order to find Asian Development Bank funded projects in Sri Lanka, visit

 www.adb.org

On the homepage, select country, ‘Sri Lanka’ and click on ‘projects’. There one can find an overview of all loans, grants, technical assistance and private sector projects supported by the ADB.

Netherlands funds
In addition to the international available funds one can utilize to undertake operations in Sri Lanka the government in the Netherlands also has its own funds to enhance international trade. The trade instruments available to enhance Netherlands - Sri Lankan bilateral relations are ORET (Development-Related Export Transactions), PESP (Programme for Economic Cooperation Projects), PSOM (Program for Cooperation with Emerging Markets), NMCP (Netherlands Management Co-operation Program) and finally the CBI, which is the Centre for the Promotion of Imports from Developing Countries. These trade instruments will be elaborated on in the chapter on ‘what the Netherlands can do for you’.

Public listing
Another manner in which to acquire funds when setting up a business in Sri Lanka is to list one’s company as a business entity at the Colombo Stock Exchange (CSE). This institution is elaborated on in chapter 8.6, although for more information one can also contact the CSE directly:
Colombo Stock Exchange Level 4,
04-01 World Trade Center
Colombo 01 Sri Lanka
Tel: 0094 11 2 439144-6
Fax: 0094 11 2 439148

Chapter 4 - What can the Netherlands do for you?

4.1 Netherlands representation in Sri Lanka
4.2 Trade instruments
4.2.1 CBI
4.2.2 ORET
4.2.3 PESP
4.2.4 PSOM
4.2.5 NMCP 

The Netherlands representation in Sri Lanka consists of an Embassy which is located in Colombo, the capital of Sri Lanka. Concerning trade this Embassy is primarily focused on providing services to Netherlands companies and to promote economic relations between the Netherlands and Sri Lanka. The Economic and Trade department of the embassy is responsible for the promotion of Netherlands exports and investments in Sri Lanka. This section also reports regularly on developments in the Sri Lanka economy in all its aspects. The recipients of this information are mainly the Netherlands Ministries of Economic Affairs and Foreign Affairs, as well as the Foreign Trade Office, the EVD. Furthermore as much information as possible is published on the web site, such as market data, market reviews and reports, government rules and regulations, information on main sectors of the Sri Lankan industry, and also business information.

The Netherlands Embassy additionally organizes promotional activities within the framework of trade and investments. The economic department will provide Netherlands companies and individuals interested in doing business with Sri Lanka or investing in Sri Lanka with relevant information regarding export and investment possibilities. Furthermore the department answers trade requests and gives trade information. In this respect though the economic section only provides first aid information within the framework of doing business in Sri Lanka. The department can provide general information on establishing a business in Sri Lanka and can additionally give information on local organizations that are able to assist in this process. Direct assistance for the establishing of companies cannot be provided by the Embassy.

To recapitulate the Embassy provides the following services to Netherlands companies:
• Basic information about Sri Lanka.
• Relevant macro-economic figures, business culture information, market information, sector and general product information.
• Analysis of present and future economic developments
• Answers to questions regarding export to Sri Lanka
• Collective trade promotion activities
• Trade fair participation, sector analyses, seminars, booklets etc
• Information on laws and regulations
• Information about the Netherlands Government Support Programs, such as ORET, PSOM, PSEP, PUM and the CBI (to be discussed in the following sub-chapter)
• Overview of business opportunities and threats in a number of key sectors
• Promotion and protection of Netherlands companies’ interest, especially in case of interference from the side of the Sri Lankan Government.

When the foreign investor has already established his or her company, the Embassy can support its presence and promote business in case any business opportunities come along that might be of benefit to the foreign investor. In order to do so though, one must make sure to inform the Embassy of their presence in Sri Lanka and what it exactly is that they do.

On request assistance can also be provided to Sri Lankan companies, however another valuable source for them would be the Sri Lankan Embassy in The Hague (Netherlands), email:  information@infolanka.nl. The embassy provides the following services to Sri Lankan companies:
• Basic information about the Netherlands
• Macro-economic information of the Netherlands, business culture information
• Information and addresses of Netherlands importers

One-Stop shop for information on developing your business in emerging markets.
The Netherlands Ministry of Foreign Affairs has a database called ‘Developing your Business’, which aims at stimulating business with and in emerging markets, including many developing countries. Companies can access the database on the internet to find answers to questions about doing business in emerging markets. The database contains information about grants, import and export support, investment, research, networks, training courses and relevant websites.

Improving the business climate in developing countries is a high priority for the Netherlands Minister for Development Cooperation, Agnes van Ardenne, Economic growth creates new jobs and helps to combat poverty. Netherlands companies that set up activities with foreign partners in emerging markets may qualify for grants under various programs, such as PSOM and ORET. The new database provides detailed information about these grant programs. An extensive English-language version of the database is available at  www.evd.nl/DyB. It provides information about the opportunities in each country for the international and local business community. The search engine recognizes country names and key words. The database is available is free of charge. It is managed by the EVD, the Netherlands Foreign Trade agency.

Contact
For trade requests or any further information concerning economy and trade between the Netherlands and Sri Lanka you can contact the Economic and Trade Department of the Royal Netherlands Embassy in Colombo at +94 11 2596914 ( col@minbuza.nl att: Economic and Trade department)

The CBI, Centre for the Promotion of Imports from Developing Countries, is an agency of the Netherlands Ministry of Foreign Affairs and puts you in touch with the markets of Europe. Since its establishment in 1971, the CBI operates within the policy framework set by the State Secretary for Development Co-operation. Its mission is to contribute to the economic independence of developing countries. To fulfill this mission, the CBI aims at strengthening the competitiveness of companies of those countries on international markets and primarily the western-European market. This is done by helping to improve conditions in enterprises and Business Support Organizations (BSOs). The CBI considers social values and compliance with the most relevant environmental requirements to be an integral part of its policy and activities. The institute offers the following programs and services:

• Market Information: a variety of tools is used to inform exporters and business support organizations in developing countries about characteristics, structure, trends, requirements and opportunities in the West European market.

• Intermediary services: intermediary services aim at the matching of selected exporters in developing countries and importers in the EU.

• Export Development Programs (EDP): this consists of assistance programs for exporters in developing countries, including technical assistance, export marketing training, and market entry support.

• Human Resources Development: seminars for exporters and BSOs on international marketing management and trade promotion issues are organized in Rotterdam (duration one to two weeks) and workshops on export marketing and management, within a specific sector or on a specific subject, are organized in developing countries (duration 2 to 4 days).

• BSO development program: tailor made assistance is provided to BSOs, based on need assessment.

• Multilateral cooperation: this is the promotion of co-operation with international organizations, such as the International Trade Centre (ITC/WTO), World Bank, UNIDO, EU and other import promotion organizations.

For more information on the CBI's programs and services visit the CBI website at  www.cbi.nl  

4.2.2 Development-Related Export Transactions (ORET)
Developing countries that wish to invest in local infrastructure and thus need foreign goods and services, can apply for an ORET grant in order to alleviate the investment costs. The ORET program reduces the costs of eligible projects through the award of grants for the purchase of capital goods, services or works from The Netherlands. Since Januari 1 2007 Price Waterhouse Coopers (PWC) runs the ORET program on behalf of the Netherlands Ministry of Foreign Affairs.

An ORET grant may be used to partially finance, for example, investments in roads, health care, education or drinking water facilities. The grant has to be applied for by the company that wants to supply the goods, work or services. If the investment and the export transaction meet the conditions of the ORET program, a grant is then awarded to the importing company in the developing country.
ORET contains three facilities: a tied facility, an untied facility and a special facility aimed at investments in the drinking water and sanitation sector.
- The tied facility is intended for export transactions to selected countries. The grant can be exclusively requested by a Netherlands enterprise that wants to carry out the transaction.
- The untied facility is intended for export transactions to the so-called Least Developed Countries (LDCs). The grant can be requested by a Netherlands as well as a non-Netherlands enterprise.
- The water facility is intended for export transactions that have to do with investments in the drinking water and sanitation sector.

For Sri Lanka the relevant facility is the tied facility. This tied facility is applicable to the export transactions of a selected group of developing countries. The developing countries importing certain products can be awarded a grant of 35% of the total transaction value. Only companies that are established in and operate from the Netherlands may apply for such an ORET grant on a project. Furthermore, at least 50% of the project’s transaction must be of Netherlands origin.
Companies who wish to apply for an ORET grant are required to submit a fully completed application form. In addition, the applicant must submit a priority statement from the national authorities of the developing country as well as a feasibility study for the entire project of which the transaction is a part. Furthermore, a signed letter of interest between exporter and client is required. PWC does not only assess ORET applications on financial, technical and organizational feasibility, but also on the sustainable development impact on the local economy.

If you would like more information on the ORET program, please contact PWC to discuss your export and investment plans. More information can also be found on the PWC website:  www.pwc.nl  

To draw the attention of the emerging, and often booming, markets to what Netherlands business and industry can offer, the Ministry of Economic Affairs launched the Programme for Economic Cooperation Projects in 1987.

Objective
The objective of the PESP is to enhance the chances of Netherlands firms to secure export orders and to promote international cooperation. PESP provides financial support primarily for feasibility studies, and investment preparation studies. It is also possible to receive a reimbursement for activities in the project identification and foreign expert assessment spheres, provided this is in the preliminary phase of export. The studies can be conducted in any economic sector, as long as it yields export for a number of Netherlands firms anything is in principle allowed within PESP. However, PESP projects must be directed towards emerging markets. All countries in Asia (excluding Japan), Middle- and Eastern Europe, Africa, Latin America and the Middle East are regarded as emerging markets.

Support
The PESP support can amount to two-thirds of the study costs up to a maximum of around € 137.000. This means that other parties must carry at least one third of the costs. Settlement takes place on the basis of a previously prepared work plan, including a preliminary budget, a final report and a final settlement accompanied by an auditor’s report. The work plan must be verifiable, meaning that it should specify what activity will be executed where, by whom and for what purpose. A phased plan of action and a detailed budget must also be provided.

Conditions
To qualify for PESP support in the preliminary phase, the study must meet the following conditions:
• PESP-studies should be submitted by a consortium, in which a minimum of two exporting or investing companies will participate, including contributing financially to the study.
• One of the companies will act as spokesman/secretary for the consortium. The consortium can, if so desired, be complemented by a consultancy agency.
• In principle an exporting or investing company can only be part of a consortium twice a year.
• There is a clearly identified counterpart in the recipient country that wishes to cooperate with the Netherlands consortium on the project, and may be willing to bear some of the study costs.
• A prospect on how the implementation phase will be financed, should the PESP study prove feasible, is available. PESP studies regularly serve as ‘bankable’ reports.

The project that can be implemented after the PESP study must in any case meet the three conditions. First of all the project must lead to broad-based direct export of capital goods and/or services from the Netherlands. The value of the intended export should be at least ten times the PESP contribution. Secondly the project must increase awareness to what the Netherlands business and industry can offer to the country in question. Finally PESP is not intended as an acquisition instrument for firms which simply want to sell their consumer products on a faraway market. For more information please visit:  www.evd.nl/pesp  

4.2.4 Program for Cooperation with Emerging Markets (PSOM)
PSOM is a program in which both the Ministry of Foreign Affairs and the Ministry of Economic Affairs have combined their strengths. This program was initiated in order to share some of the initial financial risks that companies face when investing in new products and/or new technologies in the emerging markets of developing countries. The overall goals of the PSOM are first of all to encourage investments in the selected developing countries and promote lasting investment and/or trade relationships between Netherlands and local companies. The second goal is to contribute to the alleviation of poverty in the developing countries through transfer of knowledge and technology and the strengthening and diversifying the local private sector.

PSOM funds are made available to consortia of Netherlands companies and companies of the host country interested to undertake such an investment project. This fund co-finances pilot projects, which are to catalyze long term investments and a lasting trade relation between the parties.
A typical PSOM-project involves a mix of technical assistance, hardware supply and installation, marketing, demonstration and training. PSOM projects usually try out, on a pilot scale, a new line of production or production technology to see whether it is commercially feasible in the country concerned and whether (export) quality standards can be attained. Investors are expected to observe a high standard of Corporate Social Responsibility. The PSOM-program will pay 50% of the costs (60% in Least Developed Countries) of the projects, which are selected based on a call for proposals.

The legal basis for PSOM is provided by a Memorandum of Understanding (MoU) between the Netherlands government and the government of Sri Lanka, in which the following priority sectors are mentioned (N.B. project proposals for other sectors are NOT excluded from consideration):
• Agriculture and agro-business
• Textile and garment industry
• Physical infrastructure in Sri Lanka
• Information Technology
• Tourism
The Ministry has appointed the EVD, an executing agency of the Netherlands government, to implement PSOM.

Twice a year the EVD invites companies to submit project proposals. The proposals are to be written according to the pending tender instructions. In 2006 there were two tender opportunities. The tender procedure has two stages of appraisal of the proposal. When a project proposal is received by the EVD it is first established whether basic conditions have been met for PSOM eligibility. Once this has been determined, a selection committee of EVD selects and ranks the proposals. PSOM proposals will be evaluated against four criteria: The strategic interest (including sector choice or regional preference expressed by host country), the business- and project plan, the pilot character, and additionally the effects on development.
For more information on PSOM procedure, please look on:
 http://www.evd.nl/business/programmes/ProgrammaInt_psm.asp?land=psm

4.2.5 Netherlands Management Co-operation Program (NMCP / PUM)
NMCP stands for Netherlands Management Co-operation Program and is an independent organization that assigns senior advisers, many of whom are retired or have taken early retirement, to companies and organizations in Africa, Asia, Latin America, and Central and Eastern Europe. These advisers share their knowledge and experience without receiving any financial reward. The NMCP, as a partnership between employers and the government, was set up in 1978 at the initiative of a Netherlands industry association (VNO), which has meanwhile merged to become VNO-NCW. Since March 1997, NMCP has become an independent organization, though it still has close ties with VNO-NCW, which still provides financial support. In selecting the countries to which it assigns experts, NMCP adheres to the policy of the Netherlands’ government and the European Union, who together are the main funding institutions of the NMCP mission by means of annual grants. The NMCP is now active in eighty countries and has about 3000 senior advisers on file. Of these, about 1200 are assigned each year.

By providing personal and direct advice to companies and organizations NMCP seeks to contribute to the development of a social market economy in the countries where it is active. Other intentions are to increase employment in those countries, improve international co-operation and encourage cleaner production. Independent research has shown that provision of direct advice by senior advisers is highly effective. Most of the missions carried out by NMCP expert's thus lead to an improvement in company results. NMCP has senior advisers available in practically every field of agriculture, industry and trade but also in the fields of health care, management and public sector services. Through their previous work experience they are able to assist companies and organizations with their knowledge and experience. The experts are often familiar with the type of company to which they are being sent as an adviser. This because many of them have worked in the countries where NMCP is active and are thus acquainted with local conditions and customs.

The search for the right senior adviser to match an application is the work of seventy country coordinators and sector advisers. These are also volunteers and do not receive any financial reward for their work. Moreover NMCP has a network of 150 representatives in the countries where it operates. NMCP determines the length of the mission in consultation with the company in question and the adviser to be assigned. Missions in Europe last on average three weeks with a maximum of two months. In Africa, Asia and Latin America this is seven weeks, with a maximum of three months. A follow-up visit is common. After the mission then many experts continue to assist the companies they have advised from the Netherlands.

Besides advising companies and organizations abroad, NMCP also organizes training courses in the Netherlands. Many of the advisers sent on missions take notes during their assignment as to how the results of the company they are assigned to could be improved through training of its personnel in the Netherlands. Due to this hundreds of trainees come to the Netherlands every year. Furthermore entrepreneurs in Africa, Asia, Latin America and Central and Eastern Europe are assisted in getting in touch with fellow businesses in the Netherlands by means of the Business Link Program. Guidance is given by an NMCP expert who uses his/her business contacts in the Netherlands.

Any local private or state company, which is independent and works commercially, can apply to NMCP, under the condition that it is not a subsidiary of a foreign or multinational company. Only companies though, that lack financial resources of their own are eligible to call upon the services of an independent external adviser. Furthermore there has to be a reasonable relationship between the costs of the mission - e.g. the traveling expenses to the country in question, insurance, administrative costs and the like - and the result to be expected. The company requesting a manager pays the local costs, such as accommodation, cost of living, transport and office facilities.

Foreign companies and organizations that are interested in the NMCP can obtain an application form from NMCP in The Hague or from the local representative in Sri Lanka. Contact details of the local representative of NMCP in Sri Lanka:
Mr S.P.C. Kumarasinghe
Tel: 0094 11 2695590 Fax: 0094 11 5361423
Email:  kumar4@dialogsl.net ,  kumar45@sltnet.lk  

NMCP in The Netherlands:
E-mail:  info@nmcp.nl  

Chapter 5 - Customs, Trade Regulations and Taxes

5.1 Customs
5.2 Imports Division of the Sri Lanka Customs
5.3 Pre-import classification rulings
5.4 Customs levies and tariffs
5.5 Trade barriers
5.6 Standards and Certification
5.7 Labeling and marketing requirements
5.8 Prohibited and restricted imports
5.9 Export control
5.10 Taxation

5.1 Customs
In the past Sri Lanka used to be a primarily agricultural and self-dependant sovereign nation. Due to historical, political and economical changes though it has ceased to be this self-sufficient nation and today it is mainly dependent on trade. The key body in Sri Lanka facilitating the first step of this trade, namely import and export is the Sri Lankan Customs Department (Sri Lanka Customs).
Sri Lankan Customs enforces revenue and social protection laws of the state while aiming to facilitate trade. This all with the objective of contributing to the national effort and in due recognition thereof.

Contact details:
Customs Department of Sri Lanka
Bristol Street Times Building,
Colombo 01 Sri Lanka
Tel : 0094 11 2421141, 2445147, 2445144, 2347881
Fax : 0094 11 2446 364
Web :  www.customs.gov.lk  

When planning to import products to Sri Lanka a foreign businessman will have to know the ins and outs of the Sri Lanka Customs Imports Division. This division consists of three separate units, the Long Room, the D-branch and the Postal Appraising unit. The responsibilities and objectives of these units are to collect customs duties and other levies on importation, such as Goods and Services Tax, National Security Levy, Excise Duty, etcetera. They also have to ascertain whether commodities are correctly classified and valued for collection of duties, other levies and statistical purposes. Thirdly they enforce customs law and are there to facilitate trade by providing effective and efficient service. Finally they act against violation of the customs law and other related laws. The Long Room, being the Import Goods Declaration Processing Centre for Sea Cargo which is subject to customs duty and other levies, is the highest revenue collecting point in Customs. It is in this department where the processing of all import documents is carried out. To have one’s Import documents processed, the Customs Form number 53 has to be properly filled in and submitted to this office with all required documents. More information on this can be found on the customs website:

 www.customs.gov.lk

The Postal Appraising Unit is where the documentation and delivery of all mail cargo is processed. There are separate counters for Air, Sea, Packets and Express mail. Once the POD (Post Office Document issued by the Postal Department) is submitted the parcel/packet will be examined and appraised by the customs staff in the presence of the recipient or a nominee. Then customs duties and other levies will be collected by the Postal Department before handing the object over to the recipient.

The "D" branch is the secretariat of the Imports Division. It is the final authority for classification disputes, exchange and import control violations. All the documents related to these discrepancies are referred to this secretariat for final decision. Duty waivers, concessions and exemptions are registered here and it is also the place where provisional Customs Declarations (CUS$ECS) and refunds documents are processed. Registration of Customs house agents, investigations and inquires arising on matters related to the imports are also conducted in the "D" branch.

Payments for import of goods can be made under letters of credit (LoC), Documentary collections (Documents against Payment (DP) or Documents against Acceptance (DA) terms) or Advance Payment terms. Goods can also be imported to Sri Lanka on a consignment account basis, where the goods imported are books and periodicals or ornamental fish imported for re-export. LoCs are valid up to 365 days.
Imports on Advance Payment terms are allowed where the total value of the goods does not exceed $10,000. Payments for imports made on Advance Payment basis can be made through bank