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Commercial Guide 2006 Embassy of the Kingdom of the Netherlands, Colombo, Sri Lanka, December 2006A Commercial Guide to Sri Lanka Introduction Introduction 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 Environment1.1 Political Environment 1.1 Political environment 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 ( 1.2 Economic environment
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
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
Source: Central Bank of Sri Lanka, Monthly Bulletin, August 2006
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.
Chapter 2 - Sri Lanka as a business partner2.1 Introduction 2.1 Introduction
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 2.3 Business culture
The Private Sector 2.4 Business customs
2.5 Trade agreements
Sri Lanka and India
Sri Lanka and Pakistan 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:
Sri Lanka and Asia
Sri Lanka and the EU
Further information on all Sri Lanka’s trade agreements is further posted on
Conclusions to Trade Relations Chapter 3 - Selling Netherlands products and services3.1 Introduction 3.1 Introduction
3.2 Types of companies
Private Companies Public Companies Offshore Companies 3.3 Business options
3.3.2 Establishing an office Liaison/Representative Offices Branch office
Subsidiaries 3.3.3 Joint Venture Company 3.3.4 Direct marketing
3.4 Trade promotion and advertising
3.4.1 Foreign companies
Initiating a business
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 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:
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.
3.4.2 Sri Lankan companies Collecting Information 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 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. Government tendersDetails 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.lkIndustry 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.
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.orgOn 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 Public listing Chapter 4 - What can the Netherlands do for you?4.1 Netherlands representation in Sri Lanka 4.1 Netherlands representation in Sri Lanka
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:
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: One-Stop shop for information on developing your business in emerging markets. 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 Contact 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 4.2.2 Netherlands Management Co-operation Program (NMCP / PUM)
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:
NMCP in The Netherlands:
Chapter 5 - Customs, Trade Regulations and Taxes5.1 Customs 5.1 Customs Contact details:
5.2 Imports Division of the Sri Lanka Customs
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.lkThe 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.
Basic documents required by commercial banks for imports include an invoice, if applicable an insurance certificate, and transport documents. Depending on the product and the mode of payment, documents such as certificates of origin, inspection certificates and packing lists may also be required. Shipments by air cargo may require the same documentation as those arriving by sea. All shipping documents in relation to imports made on DP or DA terms should be forwarded by the supplier's bank or by the supplier to a commercial bank in Sri Lanka for release to the importer of goods.
To clear goods from customs, the importer should submit relevant shipping documents certified by a commercial bank and customs declaration forms to the Sri Lanka Department of Customs. In the case of an import made on AP basis, goods will be released on submission of satisfactory proof of payment such as bank confirmations. In the case of an import made on consignment account basis, goods will be released by customs on the submission of clearance documents. The government is introducing an electronic data system to expedite import/export clearance procedures. 5.3 Pre-import classification rulings
Sri Lanka requires import licenses for over 300 items at the 6-digit level of the Harmonized System (HS) code, mostly for health, environment, and national security reasons. Importers must pay a fee equal to 0.1 percent fee of the import price to receive an import license. The application for this can be made to the D-Branch of the Imports Division. At the time of submitting such an application, all particulars of the commodity to be imported, including relevant literature, chemical composition if applicable, the end use of the commodity and so on, will have to be provided. It would be useful if a sample also could be made available to the Customs. Based on the details given by the Importer, the Customs would decide the HS No. applicable to that commodity. This ruling would be binding on the Customs for a period of six months from the date of the ruling. 5.4 Customs levies and tariffs
Sri Lanka's main trade policy instrument has been the import tariff. The tariff structure is subject to frequent changes. In November 2004, the number of tariff bands was reduced from six to five. This new 5-band tariff structure is the following: 0 percent – Essential commodities 2.5 percent – Basic raw materials 6 percent – Semi processed items 15 percent – Intermediate goods, spare parts etc 28 percent – Motor vehicles and other finished products Duty rates on basic raw materials are kept at the lowest tariff level while intermediate goods are placed at the intermediate tariff. Finished products on the other hand are placed at the highest tariff levels. Textiles, pharmaceuticals, and medical equipment are free of duty. Tobacco and cigarette tariffs range from 75 percent to 250 percent. In addition, there are specific duties on certain items, including footwear, ceramic products, and agricultural products. These specific duties are designed to protect domestic producers. Some items are subject to an ad valorem or a specific duty, whichever is higher, and there is intermittent use of exemptions and waivers. Imports for export industries enter duty-free. In addition, departing from the previous liberalization path, the Sri Lankan government imposed a new import tax on selected items identified as ‘non-essential’, by way of a levy (referred to as a EDB Cess or a Export Development Board Levy). This Cess can be imposed both on Imports & Exports.
(A list with details on the Cess rates imposed on non essential imports is available on the Customs website or at the Embassy). This tax was imposed in light of a decline in foreign reserves, though the government also hopes it will protect domestic agriculture and industry. Despite an improvement in the foreign reserve position though, the government has not revoked this tax. Other charges on imports include:
Note: VAT and Excise fee are charged on both imports and domestic products. The government of Sri Lanka implemented the WTO Customs Valuation Agreement in January 2003 and follows the transaction value method to determine the C.I.F. value. The scheme has operated quite successfully, and major companies have not faced problems. Customs is also in the process of installing an Electronic Data Interchange (EDI) system to support an automated cargo clearing facility. When implemented, this system should improve customs administration and facilitate trade. 5.6 Standards and Certification
The Sri Lanka Standards Institute (SLSI), a member of the International Standards Organization (ISO), is the national standards organization in Sri Lanka. SLSI sets product standards, approves imports covered under a mandatory import inspection scheme and performs product testing, pre-export inspection, registration of fish and fishery products and ISO quality management training. At present there are 85 items that come under the Sri Lanka Standards Institution (SLSI) mandatory import inspection scheme. These importers have to obtain a clearance certificate from the SLSI to sell their goods. SLSI accepts letters of conformity from foreign laboratories, but retains the discretion to take samples and perform tests. The Sri Lanka Sri Lanka Standard Institute Regulations for Imports are provided in Extra Ordinary Gazette notification No. 1203/29 of 28th September, 2001. The import standards schedule given is available on the Customs website or at the Embassy. Sri Lanka has adopted ISO 9000 series standards on quality management and assurance, ISO 14000 standards on environment management systems, Hazard Analysis and Critical Control Points (HACCP) assurance for food safety standards, and Good Management Practice Certificate (GMP). 5.7 Labeling and marking requirements
All labeling of packages should be in large bold lettering in indelible ink or paint. For container cargo, the weight, center of gravity, and sling or grab points may be marked to encourage careful handling. Goods shipped to Sri Lanka should be well-packed in order to withstand heat, humidity, rough handling and pilferage. Shipping marks should show consignee order number and port of entry. Concerning food labeling; the government has recently introduced additional labeling requirements for food imports. The regulations require that food products cannot be sold, offered for sale, transport or advertised unless labeled in accordance with these regulations. The regulations govern the information that should appear on a label of any pre-packaged food product offered for sale, transported or advertised for sale in Sri Lanka. This includes all imported food items as well. New features of the latest regulations include the date of manufacture, the name or INS number of the food additives, claims that are allowed and disallowed, etc. Detailed instructions of these regulations can be found in the government Gazette No. 1323/2 of January 12, 2004. There is discussion within some sections of the health and environment sectors to introduce a labeling requirement for imports of genetically modified food, but no requirements are currently in place. 5.8 Prohibited and restricted imports
Restricted items The Department of Import and Export Control which functions under the Ministry of Commerce and Consumer Affairs is charged with the administration of Imports and Exports Control Act no. 1 of 1969, which was amended by the Act no. 48 of 1985 and Act no. 28 of 1987. This department issues licenses to import items shown in Column 111 of the Extra Ordinary Gazette Notification No. 913/13 published on April 8, 1992. Prohibited items
Exporting companies approved by the Sri Lankan Board of Investment (BOI), are generally entitled to corporate tax holidays and concessions. Exporters receive institutional support from the Export Development Board in marketing. Imports for exporting industries and BOI approved projects usually are exempted from payment of VAT. For others, the VAT is refunded. The airports and ports levy on imports for export processing is 0.25 percent of the CIF (Cost, Insurance, and Freight) value. Furthermore there are a number of items for which licenses should be obtained if they are meant for export. These licenses have to be obtained from the Department of Import and Export Control and are applicable to the following categories: - Coral Chunks and shells (HS codes: - Timber: Wood and articles made of wood, excluding Coconut Charcoal, household utensils of wood and manufactured articles of wood (except Ebony). - Ivory and Ivory products - Motor vehicles registered in Sri Lanka prior to January 1st, 1945 Sri Lanka has recently introduced a range of new taxes and showed the intention to increase some existing ones. The latter became clear when the 2007 budget was announced and with it increased corporate and personal taxes and other indirect taxes. These taxes are in addition to the new import fee on a range of consumer goods and non-essential items which was introduced in 2004; the EDB Cess, which was mentioned before. Although the government states that the taxes are much needed, these additional taxes, and specifically the ones on imports go against the liberal trade regime once followed by Sri Lanka. The economic service charge tax also mentioned before for instance, ranging from 0.25 % to 1 % of turnover depending on the type of business, applies to all companies with turnover exceeding US$500.000, including those currently benefiting from so-called tax holidays. Companies already paying income tax will be able to offset this new tax against their income taxes. Nevertheless, for some companies and especially for foreign investors who have tax holidays it will be an extra financial burden. Double Taxation Relief Agreements
The Double Taxation Agreement between the Netherlands and Sri Lanka was first signed in 1982 and was then resigned in February, 2006. At that moment Sri Lanka also signed such agreements with a large amount of other countries: Australia, Belgium, Bangladesh, Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Indonesia, Italy, Iran, Japan, South Korea, Kuwait, Malaysia, Mauritius, Nepal, Netherlands, Norway, Oman, Pakistan, Poland, Romania, Russia, Saudi Arabia, Sweden, Singapore, Switzerland, Thailand, United Arab Emirates, United Kingdom and United States of America. The existing taxes, to which the Convention between the Netherlands and Sri Lanka applies, are the following:
In Sri Lanka:
Chapter 6 - Investing in Sri Lanka6.1 Investment climate 6.1 Investment climate
6.2 The Board of Investment (BOI)
Performance requirements Foreign investment is encouraged by the BOI a number of areas, including information technology, electronic assembly, light engineering, automobile parts and accessories manufacturing, industrial and IT parks, rubber based industries, information and communication services, tourism and leisure related activities, agriculture and agro processing, port related services and infrastructure projects. Foreign investors are generally not expected to reduce their equity over time, nor are they expected to transfer technology within a specified period of time, except for build-own transfer or other projects in which the terms are specified within pertinent contracts. In some BOI approved enterprises businesses are required to maintain certain levels of employment. In addition, privatization agreements prohibit new owners from dismissing workers as a rule, although the owners are free to offer voluntary retirement packages to reduce their workforce. Investment Incentives Incentives: Above industries will qualify for a five-year tax holiday initially. A preferential tax of 10 percent in the 6th and 7th years follows the tax holiday. After the 7th year, a preferential tax of 15-20 percent will apply. In addition, these industries qualify for duty-free imports (generally, during the life of the project for export-oriented projects, and during the project implementation period for others).
Incentive Program II
Incentives: Above industries will qualify for a 3-year tax holiday period initially. A preferential tax of 10 percent will apply in the 4th and 5th years. From the 6th year onwards, a preferential tax of 15-20 percent will apply. In addition, capital goods will be exempted from import duty. A recently introduced Economic Service Charge at 0.25 percent of income will be applicable to BOI approved companies enjoying tax holidays, from the fourth year of operation. The new tax applies even to those companies already operating in Sri Lanka. Even with incentives and BOI facilitation though, foreign investors can face difficulties operating in Sri Lanka. Problems range from the ordinary but critical matter of clearing equipment and supplies through customs speedily, to obtaining a factory site. Partly to avoid part of these tangles and in addition to overcoming land allocation problems, the BOI encourages investors to locate their factories in BOI managed industrial processing zones. Investors locating in industrial zones also get access to relatively better infrastructure facilities such as improved power reliability, telecommunication and water supplies. Infrastructure development Free Trade Zones and RegionalDevelopment Incentives The BOI has launched a new incentive program to promote regional development with the aim of establishing 300 new factories or service companies (such as hotels, hospitals, training institutes) in the regions outside the capital Colombo. The incentives include 5-10 year tax holidays depending on the location, with firms going to most difficult areas eligible for a 10-year tax holiday. In addition, imports of machinery and equipment would be exempted from both customs duty and the value-added tax. The BOI also actively encourages the establishment of export-oriented factories in the newly developed industrial zones. The institution states that it finds it easier to provide infrastructure facilities and security, as well as to monitor enterprises, when companies are located in the zones. However, an important remark has to be placed here, as the sound infrastructure facilities promised by the BOI for these Industrial Zones, very often fall short of their requirements. Nearly everywhere there are still only two-lane roads, which are overcrowded with the industrial traffic as well as the local traffic having to use them. Furthermore there is not a good maintenance of these roads, what leads to holes and cracks being a regular nuisance to passing traffic. Besides the road network, there is a rail network in the country, though this does not extend into the trade zones and is thus not exploitable to the industry. Sri Lanka has 10 free trade zones, also called export-processing zones, administered by the BOI. The oldest, the Katunayake and Biyagama Zones, located north of Colombo near the Bandaranaike International Airport, are fully occupied.
For further information on investment incentives and other investment related issues one can contact the BOI directly (see below), go to their website: 6.3 Foreign investment openness
The government relaxed investment rules in early 2002, allowing 100 percent foreign investment in the many sectors: banking, finance, insurance, stock-brokering, construction of residential buildings and roads, supply of water, mass transportation, telecommunications, energy production and distribution, professional services, and the establishment of liaison offices or local branches of foreign companies. These services are regulated and subject to approval by various government agencies. The screening mechanism is generally non-discriminatory and, for the most part, routine. Though following the practice of most countries, Sri Lanka also has a list of business activities, which restrict foreign investment and require approval by other statutory agencies. The degree of restriction varies across different areas of investment. An overview is stated below, though the government is committed to reducing this list further to broaden opportunities for foreign investors and they always look at it case by case. Areas Totally Reserved For Sri Lankans Areas Subject To Automatic or Conditional Approval
Regulated Areas
6.4 Government involvement in investment 6.5 Judicial System Foreign Investment Law
Bankruptcy Law 6.6 Dispute settlement: Arbitration
The Arbitration Act of 1995 gives acknowledgment to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This means that arbitration awards made abroad are now enforceable in Sri Lanka. Similarly awards made in Sri Lanka can be enforced abroad. A center for arbitration known as the Institute for the Development of Commercial Law and Practice (ICLP) has been established in Colombo. This center has been set up to aid the settlement of commercial disputes in an expeditious, economical, and private way. This ICLP appears unlikely though to become implicated in disputes involving the Sri Lankan government, the source of most disputes in recent years. Sri Lanka's first commercial mediation center was established in 2000 and became operational in mid 2001. Commercial mediation is conducted under the Commercial Mediation Act. Interest in mediation though is still low. 6.7 Private ownership and Establishment
Private entities in Sri Lanka are free to establish, acquire, and dispose of interests in business enterprises. These enterprises enjoy benefits similar to those granted to public enterprises and there are no known limitations of access to markets, credit, or licenses. Foreign ownership is allowed in most sectors. The Sri Lankan government owns about 80 percent of the land in Sri Lanka, including the land housing most tea, rubber and coconut plantations. The government has leased most of these plantations to the private sector on 50-year terms. Although state land for industrial use is usually chosen on a 50-year lease basis, 33- or 99-year leases may also be approved on a case-to-case basis, depending on the nature of the project. Private land ownership is limited to little over 20 hectares (= fifty acres or 0.2 km2) per person. Furthermore while foreign investors can purchase land from private sellers, the government recently imposed a 100% tax on land transfers to foreigners. This tax will also be applicable to a company, which is incorporated under the Companies Act of Sri Lanka, if more than 25% of the issued shares in such a company are owned by non citizen of Sri Lanka. The definition of this rule though could be particularly difficult for companies listed on the Colombo Stock Exchange since on any particular day, their ownership characteristics may vary. Apartments above the third floor of condominium buildings, land for development of large houses schemes, hospitals and hotels with a minimum investment of 10 million US$, exporting companies with a minimum investment of 1 million US$, and large infrastructure projects with a minimum investment of 50 million US$ are to be exempted from the tax. Foreigners maintaining 150.000 US$ in a bank account in Sri Lanka will be given concessionary treatment. These regulations and other exemptions can be found in the publication of the government gazette no.1386/18 of March 30, 2005. Sri Lanka has fairly adequate laws and regulations to combat corruption, but they are unevenly enforced. Foreign firms identify corruption as a constraint on foreign investment, but by and large, it is not a major threat to operating in Sri Lanka – at least once a contract has been won. Corruption appears to have the greatest effect on investors in large projects as well as in government procurement and tendering. The international "watchdog" organization promoting anti-corruption strategies Transparency International (TI) runs a national office in Sri Lanka. According to TI, corruption is perceived as most pervasive in terms of political appointments to government institutions and in government procurement awards, as well as in high frequency/low value transactions. The police force and the judiciary are perceived to be the most corrupt public institutions. Corruption is also a persistent problem in customs clearance and enables wide-scale smuggling of certain consumer items. TI’s 2003 National Integrity Systems Country Report recommends creating an independent anti-corruption authority with sufficient powers as a top priority to combat corruption. TI has asked the international donor community to ensure transparency and clear lines of accountability in the disbursement of donor aid for post war reconstruction and post Tsunami reconstruction. In response, the Government’s Tsunami reconstruction agency, now known as the Reconstruction and Development Agency (RADA) with the assistance of the United Nations (UN) has created a web based Development Assistance Database (DAD) ( The Bribery Commission in Sri Lanka is the main body responsible for investigating allegations of bribery and corruption. The Commission’s most recent term expired in December 2004, and a new Commission was re-appointed after a 3-month delay in March 2005. The function of the Commission, under Act No 19 of 1994, is to investigate allegations brought to its attention and to institute proceedings against responsible individuals in the appropriate court. The law also states that a public official’s offer or acceptance of a bribe constitutes a criminal offense and carries a maximum sentence of seven years imprisonment and a fine at the discretion of the courts. A bribe by a local company to a foreign official is not covered by the Bribery Act. Despite such a Commission and law, previous Commissions have not been effective in dealing with bribery or corruption. Few have been found guilty of corruption in recent years. Although highly publicized, efforts to investigate bribery and corruption have failed, damaging public confidence in such processes. While corruption charges have been leveled against politicians and top officials in charge of key government corporations, none of the accused has been convicted of bribery yet. Sri Lanka ratified the UN Anti-corruption Convention in March 2004. Furthermore the country has signed but not ratified the UN Convention against Transnational Organized Crime. Finally Sri Lanka is not a signatory to the OECD-ADB Anti-Corruption Regional Plan.
6.9 Transparency of Regulatory System
The BOI generally strives to inform potential investors about laws and regulations that may affect operations in Sri Lanka. Laws pertaining to tax, labor and labor standards, exchange controls, customs, environmental norms, and building and construction standards are currently in place. However, some of the laws and regulations are not freely available and are difficult to access. Foreign and domestic investors often complain that the regulatory system allows far too much leeway for bureaucracy. Outdated regulations and rigid administrative procedures imposed by public sector institutions have been identified as impediments to private sector growth. Effective enforcement mechanisms are sometimes lacking, and coordination problems between the BOI and relevant line agencies frequently emerge. Lassitude and indifference on the part of mid- and lower-level public servants add to transparency problems. Lack of sufficient technical capacity within the government to review financial proposals for private infrastructure projects also creates problems during tendering. Although many foreign investors have had positive experiences in Sri Lanka, some have encountered significant problems with government practices and regulations. Some multinational firms have encountered extensive unexplained delays in trying to reach an agreement on investment projects. Others have had contracts inexplicably canceled without compensation, even though the Sri Lankan Cabinet had approved these contracts. 6.10 Protection of property rights
Physical Property rights Physical Property rights are generally problematic, although a fairly reliable registration system exists for recording private property including land, buildings and mortgages. Even so there have been problems due to fraud and forged documents. The Government has begun to address these issues under a World Bank sponsored judicial reforms project. The legal system is nondiscriminatory and protects and facilitates acquisition and disposition of property rights by foreigners, although it has recently become subject to political influence Changes to the legal framework covering land titling have been proposed under a World Bank-funded project. These changes aim to establish land tenure, remove restrictions related to the sale, leasing and transfer and mortgaging or rural lands previously distributed to farmers by the Government. The project has also implemented a model computerized land titling system in a few villages. The government has sought World Bank assistance to extend the system to cover the entire country. Such a project, yet to be designed and approved, would take about 6 years to implement. Intellectual property rights Infringement of Intellectual Property Rights (IPR) is a punishable offense under this new law. IPR falls under both criminal and civil jurisdiction. Relief available to owners under the new law includes injunctive relief, seizure and destruction of infringing goods and plates or implements used for the making of infringing copies, and prohibition of imports and exports. Even though draft laws to delay with these matters have been finalized Sri Lanka still lacks provisions to deal with electronic transactions, electronic signatures, computer crimes and evidence.
Intellectual Property, Patents, Copyrights and Trademarks Copyrights are not registered. A work is protected automatically by operation of law. Original literary, artistic and scientific works including computer programs and databases are protected under the new law. There are enforcement limitations applying to copyrights, including software.
More information can be found at the National Intellectual Property Office of Sri Lankan:
6.11 Foreign Direct Investment
The Foreign Direct Investment (FDI) regime of Sri Lanka is open except to the areas mentioned restricted and regulated areas mentioned before in subchapter 6.2. Inflows of FDI have remained at around US dollars 200 million per annum, which is 1-2 per cent of GDP. Recognizing the importance of FDI in accelerating economic growth, the government intends to attract more foreign investment in the future, by identifying potential investors and encouraging them through various incentives and strategic agreements such as the GSP+ scheme with the EU and other bilateral agreements. The FDI outflows increased to US$ 38 million in 2005 from US$ 6 million in 2004, as a few local companies were permitted to invest abroad during that year. The Foreign Accumulated Investment inflow through BOI projects varied between the 600 and 650 Million Rs. over 2004 and 2005. Companies from the UK and the US were the largest contributors to this accumulated inflow of FDI into Sri Lanka over both 2004 as well as 2005. Malaysia, Singapore and India followed in ranking, but the inflow of FDI from the Netherlands for BOI projects did not have a place in the country top 10. Some major foreign investors in Sri Lankan include: Unilever, Nestle, British American Tobacco Company, Mitsui, Pacific Dunlop/Ansell, Prima, FDK, Telekom Malaysia Bhd, S.P. Tao and HSBC. Leading foreign investors that have acquired significant stakes in privatized companies include Chevron, Norsk Hydro of Norway, Hanjung Steel of Korea, Nippon Telephone and Telegraph, Mitsubishi Corporation and C. Itoh (or Itochu) of Japan, Emirates Airlines of United Arab Emirates, Shell of the UK/Netherlands, Maersk, and the Indian Oil Corporation (IOC). Chapter 7 - Labor Market7.1 Labor Force Two-thirds of the Sri Lanka’s labor force is male. It is expected that in 2006, the unemployment rate will be 6.7 percent, or an estimated 512,000 of a total labor force of 7,6 million will be out of work. If one does not count unpaid family workers as employed, the unemployment rate is even higher. Youth and entry-level unemployment also remains a critical problem. Nearly 80 percent of unemployed persons are in the 15-29 year age range. Over 50 percent of unemployed young people are educated up until the Ordinary-Level, which means an age level of 14 to 16 years old. Underemployment is also a major problem, with thousands of university graduates seeking places in the already bloated public sector, yet lacking skills needed in the private sector. Many qualified workers thus seek employment overseas. A significant proportion of unemployed people seek so-called white collar jobs, and most sectors seeking employees offer manual or semi-skilled jobs or require technical or professional skills such as management, marketing, information technology, accountancy and finance, and fluency in the English language. The government has initiated several programs to expand state sector employment. For instance, a graduate employment program provided about 42,000 new jobs in the government sector in 2005. A further 10,000 new jobs were to be created in 2006 and the government has promised to hire into its already bulging bureaucracy an additional 10,000 each year thereafter. Sri Lanka's labor force is literate, particularly in the local language and trainable, although weak in certain technical skills and also in the English language. More and more computer and business skills training programs and English language programs are becoming available, though the demand for these skills still outpaces the supply. The government has recognized the challenge of reformulating the educational system to better meet the needs of the private sector, but it will take time before the mismatch of skills to requirements is addressed. USAID, the Asian Development Bank and the World Bank have approved projects to improve distance learning and tertiary education. The private sector is offering various professional study courses accredited to local and foreign professional institutes and foreign universities. However, access to these courses is limited due to the high fees involved. Additionally, a fair number of Sri Lankans leave to study abroad. This fact is not to be overlooked though, as not only do more and more wealthy Sri Lankan families send their children abroad to study, these youngsters often end up staying there after their studies. They are often able get better wages and thus improve their standard of living in a manner that would not have been possible in Sri Lanka. This so-called brain drain especially poses problems for the already understaffed middle management sector. Some figures concerning education in Sri Lanka are the following: Number of University students (Undergraduates) in 2005 was 63,355, studying at 15 Universities. In the same year the major course of study taken was Arts, with 22,428 students, followed by Commerce and Management Studies with 13,529 students and Science with 9,234 scholars. Medicine, Engineering, Agriculture and Law were runners-up to the main study directions, with Computer Science and IT closing the line with 486 students in 2005. 7.3 Migrant Workers Abroad
Labor is available in Sri Lanka at a relatively low cost, though it is priced higher than in other South Asian countries. Child labor is prohibited and is virtually nonexistent in the organized sector, although child labor occurs in informal sectors. The Termination of Employment of Workmen Act (TEWA) makes it difficult to fire or lay off workers, which will be discussed later in this chapter. Most permanent full time workers are covered by laws pertaining to maximum hours of work, minimum wage, leave, the right of association, and safety and health standards. In general in the formal sector, which mainly comprises the enterprises with more than 15 workers, firms have to pay ETF (3% of Salary) and EPF (12% of salary) in addition to take home payments. Furthermore in this sector workers are also given paid holiday, sick and vacation leave. Finally as mentioned above the termination costs are relatively high in Sri Lanka. These are spelled out in the 2005 March amendment to the TEWA act. A more elaborate overview of labor costs will be given below. There is widespread belief that Sri Lanka’s labor laws and too many holidays dampen productivity. The full moon day of each month (sacred in the Buddhist faith), if it falls on a weekday, is a paid holiday. There are also eight other public holidays. The public sector and banks enjoy additional holidays. These statutory holidays are in addition to various employee rights concerning leave: - Vacation (annual leave): a 14-day vacation leave with pay from the second year of employment onwards if the employee has been continuously in employment during the year. - Casual Leave: an office employee has to be granted 7 days casual leave with pay from the second year of employment. - Sick Leave: to be granted at the discretion of management. Some enterprises grant such leave up to a maximum of 21 days. Employee must produce medical certificates to cover such leave. - Maternity Leave: female employees are entitled to 84 days fully paid maternity leave for the first two pregnancies. The 2005 budget proposed additional maternity leave benefits, but they are yet to be implemented. One must furthermore not forget the employees’ superannuation benefits: - Overtime Remuneration: Any work performed in excess of the normal working day to be treated as overtime work and shall be remunerated accordingly. Every hour of such work should be paid at 1 ½ times the normal hourly rate of wages, which is determined by dividing the monthly rate of wages by 200. In calculating hours of overtime employment, any fraction of an hour less than ½ hour shall be treated as half an hour. Employees working on Sundays and Poya days should be paid 1 ½ times the daily wage rate. If an employee works beyond the normal working day on a Sunday he/she should be remunerated at double the daily wage. - Employees Provident Fund: An amount equivalent to 20% of the employee's total earnings has to be remitted to the Fund before the last working day of the succeeding month in respect of all employees. An employee's contribution to the Fund is 8% and the employer has to contribute an amount equivalent to total earnings. - Employees Trust Fund: Employers are expected to remit an amount equivalent to 3% of the total monthly earnings of the employee before the last working day of the succeeding month. There is no contribution from the employee. Payment for work done on normal working hours on weekly holidays, poya days or public holidays should be considered for the computation of these contributions. - Gratuity: An employee who has completed five years' service shall be paid a gratuity on cessation of his employment irrespective of whether he has retired or resigned or his services have been terminated by the employer. Such gratuity shall be computed at the rate of half a month's salary for every year of completed service based on the consolidated salary last drawn by the employee. Payments should be made within 30 days of cessation of employment. An enterprise, which employs fifteen or more workers, is liable to pay such gratuity. The approximate, but not legally set minimum monthly wage is Rs 6.000 or US$60, although prices paid are often even lower. The BOI gives the following overview of the general wage levels in Sri Lanka:
Table BOI July 2006 On the whole the Government continues to interfere with private sector wage setting. In October 2005, the Government through an act of Parliament took steps to mandate a wage increase (of approximately Rs 1,000) to private sector workers. The private sector is concerned about such interference in wage setting, which could damage competitiveness in certain sectors. The minimum age for recruitment of an employee is 18 years and the normal age of retirement is 55 years. However, extensions beyond 55 years can be granted at the discretion of management. A written contract of employment embodying terms and conditions of service including the designation or category of the employee, normal hours of work, rate of pay, period of training if any, probationary period, leave, holidays and superannuation contribution, has to be issued to every worker including trainees, and acknowledgement of receipt obtained by the employer. Sri Lanka is a member of the International Labor Organization (ILO) and has ratified 39 international labor conventions. The labor laws of Sri Lanka are laid out in almost 50 different statutes. The Ministry of Labor has published a Labor Code, consolidating important labor legislation. Sri Lanka has ratified all eight of the core labor conventions included in the 1998 ILO Declaration on Fundamental Principles and Rights at Work. ILO Convention 138 on minimum age for admission to employment and Convention 182 on worst forms of child labor were ratified during 2000-2001. Sri Lanka ratified ILO convention 105 on Forced Labor in 2003. The ILO, EFC and the AFL-CIO-sponsored American Center for Labor Solidarity are working to improve awareness about core labor standards. The ILO also promotes its Decent Work Agenda program in Sri Lanka. The Termination of Employment of Workmen Act (TEA) makes it difficult to fire or lay off workers who have been employed more than six months for any reason other than serious, well-documented disciplinary problems. Disputes over dismissals can be brought to a labor tribunal administered by the Ministry of Justice. These labor tribunals though have large backlogs of unresolved cases. Certain labor disputes founded upon fundamental rights (allegations of termination/transfers based upon discrimination, etc.) can be brought directly to the Supreme Court. Productivity does lag behind other countries in Asia. While the Termination of Employment of Workmen Act (TEA) described above makes it difficult to fire or lay off workers, Parliament, through the UNF government’s labor reform agenda, passed amendments in January 2003 to the TEA and the Industrial Disputes Act (IDA) to improve labor mobility. The amendments to TEA seek to facilitate termination and provide for a standard compensation formula and an unemployment benefit scheme. They include labor dispute resolution rules to expedite the dispute process. The new termination rules became operational with the establishment of a new compensation formula in March 2005. The compensation formula takes into account the number of years of service and offers 2.5 months salary as compensation for 1 year of service, 12.5 months salary for 5 years of service; 38 months for 20 years and up to a maximum of 48 months salary for 34 years service. This of course assumes that the government will approve such a termination, which frequently is not the case. According to a recent IMF report, Sri Lanka’s firing cost for 20 years of service, at 38 months, is among the highest in Asia compared with Pakistan and Nepal’s 22.5 months, India’s 19.6 months, Malaysia’s 18.5 months, China’s 13.2 months and Bangladesh’s 11.7 months. Employers complain that the package is excessive, especially compared to international norms. They have also pointed out that higher compensation could adversely affect companies requiring restructuring, and discourage investment. Other planned reforms include amendments to the Shop and Office Act to allow female employees in the IT sector to work at night. A more systematic overhaul of the TEA and IDA would help to bring labor laws in line with international norms. About 15 percent of labor in the industry and service sector is unionized. Labor in free trade zone enterprises tends to be represented by non-union worker councils, called Employee Councils. Unions have complained that the BOI and some employers, especially in these BOI-run export processing zones (EPZ), prohibit union access and do not register unions on a timely basis. In BOI enterprises, including those in the EPZs, worker councils composed of employees generally engage in labor and management negotiations. These worker councils have functioned well in some companies in providing for worker welfare. The BOI has requested though that companies recognize trade unions and accept the right to collective bargaining. The International Labor Organization (ILO) Freedom of Association Committee has observed that Sri Lankan trade unions and employee councils can co-exist, but advises that there should not be any discrimination against those employees choosing to join a union. One must bear in mind though that the unions in Sri Lanka have appeared to be more a means to spread political interests, than institutions with a sole goal to promote the interests of their members. Therefore they are often referred to as “spoilers”, rather than constructing entities. Due to the growing strength of Marxist parties in active politics and in parliament, politicized union activity has increased, especially in government institutions. State agencies with large unionized workforces have become vulnerable to politically motivated strikes in response to restructuring and privatization. For example in the plantation sector, union participation rates reach as high as 75 percent, though these levels are reportedly on the decline. Other key public sector entities such as the Ceylon Electricity Board and Sri Lanka Ports Authority also have large unions which stage protests, often related to their pay checks and sometimes even to protest anticipated moves towards privatization or restructuring. Most of the major trade unions are affiliated with political parties, creating a highly politicized labor environment. Several trade unions with affiliations to major political parties have formed themselves into an organized group, the National Association for Trade Union Research and Education (NATURE), to promote education and training among trade unionists. 7.9 Labor-Management Relations
The attitude of employers towards workers has changed considerably in the last few years. Employers are becoming more conscious of the need to look after their human resources, and more effort is taken to ensure that workers feel motivated and cared for. While labor-management relations vary from organization to organization, managers who emphasize communication with workers and offer training opportunities generally experience fewer difficulties. Work stoppages and strikes in the private sector are on the decline. Chapter 8 - The Financial Market8.1 Monetary Policy 8.1 Monetary Policy Based on developments in the past three years, the exchange rate regime in Sri Lanka has been reclassified as managed float since June 2006 (from previous free float). The banking sector is one of the most dynamic and vibrant sectors of the economy, with developments taking place during the last decade in terms of institutions, instruments, range of services, and the geographic coverage. Financial sector reforms have been introduced to improve the efficiency and stability of the financial sector and further reforms are under way. The following types of financial institutions are available in Sri Lanka There are 23 commercial banks, consisting of eleven local banks and twelve foreign banks. In addition, there are thirteen local specialized banks. ICIC Bank of India is the newest foreign bank in Sri Lanka and commenced operations in January 2006. Between 2001 and 2003, Mashreq Bank, American Express Bank, Nova Scotia Bank and ABN Amro Bank all sold their banking operations in Colombo to existing banks. The Central Bank is responsible for supervision of all banking institutions. Wide-ranging improvements have been made in banking regulations and in public disclosure of banking sector performance. In 2002 the Monetary Law Act (MLA) was amended to provide the Central Bank broader supervisory powers and greater independence. The Bank also issued a code of corporate governance for banks and financial institutions in 2002. In addition, rules on classification and provisioning were improved significantly from January 2004. Further, the Banking Act was amended in 2005 to give additional supervisory powers to the Central Bank and to introduce guidelines to check the suitability of bank directors. The Central Bank however still suffers from lack of autonomy, especially with regard to the large state owned banks. Rapid technological advancement including an automated check clearing house that clears checks from most part of the country within three days, ATMs, credit cards, electronic funds transfer facilities and several financial derivatives are evidence to this. Several banks have introduced tele-banking and electronic business banking and many have extended banking hours with some services being made available 24 hours a day through automation. The banking system is now linked closely to the worldwide networks via SWIFT and credit card gateways. Almost all commercial banks have established Foreign Currency Banking Units. State Owned Banks Private Commercial Banks and Foreign Banks In the chapter on import the need for a Letter of Credit (LOC) was mentioned. These letters can be derived from the various commercial banks in Sri Lanka. Although the general banking situation in the country is quite shaky from time to time, the LoCs issued are trustworthy. The Development Financing InstitutionsThese are the Development Finance Corporation of Ceylon (DFCC) and the National Development Bank (NDB). They provide medium and long-term project finance, especially to the export sector. Merchant/ Investment Banks Finance companies Leasing Companies Insurance Companies Mortgage Banks Venture Capital Companies Savings Banks
Access to local credit markets by foreign-owned companies incorporated in Sri Lanka was liberalized in 2003 and such firms can now borrow Rupee funds without the approval of the Central Bank. Foreign-owned companies, BOI-approved firms and exporters can access dollar denominated loans. Applications for dollar denominated loans from local firms are considered on a case-by-case basis and not encouraged. The State consumes over 50 percent of the country's domestic financial resources and has a virtual monopoly on the management and use of long-term savings in the country. This inhibits the free flow of financial resources to product and factor markets. In the past, high interest rates, due to excessive use of short term borrowing by the state, increased intermediate costs, which led to higher costs to other borrowers. Since 2002, government policy supported a low interest rate regime and gave stimuli to increased credit, which in that period contributed to increased domestic investment as well as inflation. Though, as mentioned in the sub-chapter on monetary policy, the change of the government brought with it a deterioration of the interest rate regime, inflation rates and thus the investment outlook. The investment/GDP ratio rose to 26 percent in 2005, compared with 22 percent in 2001. The prime lending rate currently averages 12 percent. Foreign investors are allowed to access credit on the local market. They are also free to raise foreign currency loans. Credit Instruments 8.5 Conversion and transfer policies
There are also no barriers, legal or otherwise, to the expeditious remitting of corporate profits and dividends for foreign enterprises doing business in Sri Lanka. Remittance of business fees (management fees, royalties and licensing fees) is also freely permitted for companies with majority foreign investment approved under Section 17 of the BOI Act. Other companies require Central Bank approval. Funds for debt service and capital gains of BOI-approved companies exempted from exchange control regulations are freely permitted. Other foreign companies remitting funds for debt service and capital gains require Central Bank approval. All stock market investments can be remitted without prior approval of the Central Bank through a special bank account. Investment returns can be remitted in any convertible currency at the legal market rate. Controls on capital account (investment) transactions usually prohibit foreigners from investing in debt and fixed income securities. One exception has been the Central Bank’s dollar denominated bond issues in the local market that were opened to foreign investors. It has been proposed to allow foreigners to invest in corporate debentures and government bonds. Local companies require Central Bank approval to invest abroad. The process of granting approval for such investments was streamlined in 2002, resulting in a substantial increase in approvals. Securities and Exchange CommissionThe Securities and Exchange Commission (SEC) regulates the securities market in Sri Lanka. The SEC law was revised in 2003, enhancing its coverage and investigative powers. The institution now covers stock exchanges, unit trusts, stock brokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies and securities depositories. Foreign investors can freely purchase up to 100 percent of equity in Sri Lankan companies in numerous permitted sectors. In order to facilitate portfolio investments, country funds and regional funds and are also allowed to invest in Sri Lanka's stock market. Such funds must first receive Ministry of Finance approval to operate in Sri Lanka. These funds make transactions through share investment external rupee accounts maintained in commercial banks. Colombo Stock Exchange There are 242 companies listed on the stock exchange with the top ten positions by market capitalization held by banks and food and beverage companies. From 2003 to 2005, the CSE was one of the best performing markets in the world. The Cease-Fire Agreement between the Government of Sri Lanka and the LTTE has helped to boost investor confidence. Following the November 17, 2005 election of President Mahinda Rajapaksa though, the CSE has fluctuated in part depending on the level of violence in the northern and eastern provinces and hopes for improvement due to the cease-fire talks. The single overriding factor inhibiting the sustainable development of the stock market has thus been this conflict in the North and East and its effect on investor confidence and the economy as a whole. Other broader issues include lack of liquidity and limited market size. Improvements are also needed in corporate governance, accountability, and public disclosure in companies. There is an active and fairly competent accounting profession in Sri Lanka, based on the British model. The source of accounting standards is the Institute of Chartered Accountants of Sri Lanka (ICASL), and standards are constantly updated to reflect current international accounting and audit standards. Sri Lanka carried out a major revision of accounting and auditing standards in September 1997. Since then, the standards have been periodically updated to meet new international standards adopted by the International Accounting Standards Board (IASB). Due to the lack of an adequate enforcement mechanism, however, problems with the quality and reliability of financial statements still exist. Chapter 9 - SWOT AnalysisSWOT analysis of the business sector Weaknesses
Opportunities
Threats
Chapter 10 - Important websites government agencies and officesGovernment Agencies and Offices
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