This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 28 COLOMBO 000875 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA AND SA/INS 
STATE PASS USTR 
STATE PASS OPIC, TDA, EXIM 
 
TREASURY FOR DO/GCHRISTOPOLUS 
 
USDOC FOR ITA/ATAYLOR 
 
E.O 12958:N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV ECON CE OPIC USTR ECONOMICS
SUBJECT: IMI - INVESTMENT CLIMATE STATEMENT, 2005 - SRI 
LANKA 
 
REF: (A) 04 STATE 269486 (B) 04 STATE 250356 
 
¶1.  THE FOLLOWING IS THE INVESTMENT CLIMATE STATEMENT 
FOR SRI LANKA FOR 2005. 
 
INVESTMENT CLIMATE STATEMENT SRI LANKA 
 
March 2005 
 
Openness to Foreign Investment 
------------------------------ 
 
¶2.  Sri Lanka welcomes foreign investment, which has 
become an important element of the country's economic 
growth.  Sri Lanka opened its economy to foreign 
investment in 1978, long before its South Asian 
neighbors, but results have been mixed, a result of 
half-hearted commitment to economic reforms and policy 
inconsistency through changes in successive 
governments.  Over the past twenty-six years, several 
hundred foreign investors have invested in the country 
but foreign investment flows have been weak in the last 
decade due to an ethnic conflict and the inconsistent 
and erratic economic policies mentioned above.  While 
the current ceasefire led to improved investment flows 
in the recent past, the reversal of economic policies 
following the change of Government in 2004 has put a 
damper on flows once more.  Although some investors 
have done well, particularly in the manufacturing and 
services sectors, others have had problems with 
government practices and regulations, particularly in 
large-scale infrastructure projects. 
 
¶3.  Sri Lanka's economic growth has been reasonable, 
averaging 4.6 percent over the past decade.  The 
country boasts unique human development achievements 
for a developing country.  Sri Lanka's per capita 
income of $1,000, a literacy rate of over 90 percent in 
the local language and life expectancy of 72 years rank 
well above those of India, Bangladesh and Pakistan. 
 
¶4.  The 20-year ethnic conflict between the US- 
designated Liberation Tigers of Tamil Eelam (LTTE) and 
the Government of Sri Lanka has been widely recognized 
as a key drag on development and an obstacle to foreign 
investment.  A Norwegian-brokered ceasefire, between 
the LTTE) and the government, in effect since February 
23, 2002, continues to hold despite the LTTE withdrawal 
from peace talks in April 2003.  The LTTE presented its 
proposals for an Interim Self Governing Authority 
(ISGA) in October 2003.  While both parties have 
expressed their commitment to a negotiated settlement, 
efforts to restart peace talks have floundered so far. 
It is important though to differentiate between the 
peace talks, which are suspended and the overall peace 
process, which continues.  Although many ceasefire 
violations have been recorded, the peace process has 
substantially improved the political, economic and 
investment climate and initially resulted in attracting 
substantial funding from multilateral and bilateral 
donors to rebuild the country. 
 
¶5.  The December 2004 tsunami caused extensive damage 
to life and property, fundamentally altering Sri 
Lanka's economic outlook and increasing economic 
vulnerability.  Approximately 31,000 people were 
killed, another 6,300 are missing and 443,000 people 
have been displaced.  A joint damage and needs 
assessment by the key donor agencies has estimated the 
overall damage to Sri Lanka at $1.5 billion, with a 
large portion of losses concentrated in housing, 
tourism, fisheries and transportation.  Major export 
sectors were not affected.  Some of the destruction is 
in areas under the control of LTTE, which requires the 
Government to work with them to start reconstruction. 
The reconstruction program will take at least three 
years to implement. 
 
¶6.  Since independence, the rule of government has 
alternated between the two major political parties, 
United National Party (UNP) and the Sri Lanka Freedom 
Party (SLFP) or coalitions led by them.  Both the UNP 
and the SLFP generally support open and outward looking 
economic policies, though a failure to embrace 
consistent economic reform policies has sent confusing 
and inconsistent messages to investors and donors. 
 
¶7.  In February 2004, President Chandrika Kumaratunga 
dissolved the Parliament, just two years into the rule 
of the reform-minded United National Front Government. 
Subsequent elections resulted in a resounding defeat of 
the UNP, largely at hands of rural voters who had not 
yet tasted the benefits of economic reforms.  As no 
single party was expected to garner sufficient seats to 
form a government, the President's SLFP joined with the 
left leaning, Marxist-nationalist Janatha Vimukthi 
Peramuna (JVP) to form the United People's Freedom 
Alliance (UPFA) ticket to run for the election.  The 
UPFA contested the election on a platform of pro-poor 
growth policies.  The UPFA government's Economic Policy 
Framework "Creating Our Future, Building Our Nation" 
http://www. treasury. gov.lk focuses on development of 
the small and medium enterprise sector (SME), 
agriculture and infrastructure, with a much heavier 
reliance on government intervention in markets.  The 
Government has also abandoned plans to privatize 
strategic state enterprises.  Instead, the government 
will retain ownership and management of these 
enterprises ranging from large state-owned banks to 
electrical utilities.  The government hopes to insulate 
them from political interference and make them 
profitable.  Recent efforts to restructure large public 
utilities, however, have faced serious problems, due to 
stiff JVP and union opposition.  Smaller non-strategic 
state enterprises are to be privatized.  The government 
has created three new agencies to improve state-owned 
enterprises, economic development, and procurement the 
Strategic Enterprises Management Agency (SEMA), 
National Council for Economic Development (NCED) and 
Procurement Management Agency. 
 
¶8.  On a positive note, the government has acknowledged 
the vital role played by both foreign and local private 
investors in the economy.  The government has promised 
to encourage private investment through the removal of 
impediments and an introduction of an investor friendly 
administration.  However, they have introduced 
prohibitive new taxes on the acquisition of land by 
foreigners and other bureaucratically inspired 
impediments to foreign investments.  Further, import 
duties have been increased.  A new tax "Economic 
Service Charge (ESC)", ranging from 0.25 percent to 1 
percent, depending on the type of company, applies to 
all companies with a turnover exceeding Rs 50 million 
(USD 500,000), including companies enjoying tax 
holidays.  Companies already paying income tax will be 
able to set it off against income tax but for those 
companies, especially foreign investments, with tax 
holidays it will be an additional tax. 
 
¶9.  The government has rejected the former government's 
poverty reduction strategy paper (PRSP) titled 
"Regaining Sri Lanka," citing its failure to benefit 
the poor and rural areas and is in the process of 
revising the PRSP.  Pending clarity on economic and 
fiscal policies, and the presentation of a revised 
PRSP, the IMF has withheld disbursements under a 
Poverty Reduction Growth Facility (PRGF) and Enhanced 
Fund Facility (EFF) extended to Sri Lanka in April 
¶2003.  The government conducted Article IV discussions 
with the IMF and resumed discussions on PRGF/EEF 
supported programs in May 2005. 
 
¶10.  Over the past year, prior to the tsunami, macro 
economic conditions deteriorated.  In the face of a 
drought and increasing oil prices, the government 
resorted to expansionary fiscal and monetary policies 
which helped to maintain GDP growth at around 5 
percent.  Inflation rose sharply and the fiscal and 
external positions deteriorated.  There was a slowdown 
in aid and investment inflows.  The trade deficit 
expanded in 2004, despite strong export growth, due to 
a heavy oil import bill.  Gross official receipts fell 
by 13 percent to $1.8 billion.  As a result, the Sri 
Lankan Rupee depreciated throughout 2004, falling by 8 
percent against the US Dollar.  The rupee strengthened 
in early 2005, on the expectation of aid flows for 
reconstruction of tsunami damaged areas, but this 
strengthening is likely to be temporary.  Total 
reserves in January 2005 were approximately $3.3 
billion, sufficient to cover 4.9 months of imports. 
Sri Lanka's total government debt rose to 108 percent 
of GDP in 2004, of which about half was foreign (mostly 
concessional) debt. 
 
¶11.  The government took steps towards the end of 2004 
to strengthen the macro economic policy stance. 
Petroleum prices were revised upwards, and a costly 
subsidy on wheat flour was removed.  But numerous 
subsidies including petroleum (still significant, 
despite price increases) and electricity continue.  The 
2005 budget, presented in November 2004, envisaged a 
reduction in the fiscal deficit to 7.5 percent of GDP. 
The budget focuses on reducing poverty through rural 
development and higher spending for health, education 
and public infrastructure.  The budget also includes 
significant increases in government employment and 
wages (the Government has hired about 40,000 previously 
unemployed university graduates in an effort to stem 
unemployment).  It also contains new revenue measures. 
In the count down to the budget, the government took 
action to increase import taxes on selected imports. 
Despite tsunami losses, the Government has expressed a 
desire to take required action to maintain macro 
economic stability, pursue the reform agenda of the 
2005 budget, and fiscal reforms in line with the policy 
outlines of the Fiscal Management (Responsibility) Act, 
which has a deficit and debt reduction plan over the 
medium term. 
 
¶12.  Estimates vary about the tsunami's overall 
economic impact but reliable projections predict GDP 
growth to slow by .5 - 1 percent.  The bulk of the 
impact on growth is expected to be offset by the 
reconstruction effort.  The Government is trying to 
minimize the fiscal impact of the reconstruction 
program, by seeking foreign assistance.  The impact on 
balance of payments could also be significant due to 
reconstruction related imports.  Meanwhile, for the 
first time, Sri Lanka has accepted a Paris Club offer 
to freeze its debt payments by industrialized countries 
until the end of 2005, which will release approximately 
$300 million from the regular budget (allocated for 
dept repayment) for reconstruction.  In addition, the 
IMF has also approved an emergency loan of about $159 
million to Sri Lanka.  The World Bank and the ADB have 
also pledged both grant and loan assistance.  On 
balance, the level of fiscal and balance of payment 
impact of reconstruction will depend on the ability of 
the government to mobilize external resources and the 
absorptive capacity of the country.  The inflationary 
momentum from 2004 is expected to continue in 2005 with 
inflation projected to remain at double digit level for 
most of the year.  The Central Bank has so far left key 
interest rates unchanged despite rising inflation, in 
order to facilitate spending on reconstruction and 
provide liquidity for restarting economic activity. 
 
¶13.  There may be commercial opportunities for US 
companies in the post-tsunami reconstruction program. 
The bulk of the reconstruction expenditure will be 
spent on housing, townships, transportation 
infrastructure (roads, railway and ports), fisheries 
infrastructure (harbors, anchorage and related 
facilities), water supply and sanitation projects, and 
school and hospital buildings. 
 
¶14.  Numerous risks and challenges to the economy 
remain.  The peace process could falter.  Domestic 
political frictions between the President and her 
coalition partner JVP could disrupt the peace process 
or further hamper economic reform.  A weak coalition of 
political parties, and the inability of the main 
parties to cooperate on key issues have compounded the 
political difficulties facing Sri Lanka at this 
juncture.  There are concerns regarding the speed of 
reconstruction and resettlement of tsunami affected 
population.  The Government is trying to reach 
consensus with the LTTE on a framework for tsunami 
related reconstruction in the north and east.  The pace 
of reconstruction could also be hampered by 
administration bottlenecks as the state is not equipped 
to carry out large scale projects in a timely manner. 
Other down side risks will stem from uncertainties over 
oil prices and the impact of the end of the Multi Fiber 
Agreement, although large factories accounting for bulk 
of the exports are expected to continue to perform well 
in the quota free era.  Another major business concern 
in the medium term is the cost and supply of power. 
Sri Lanka has faced periodic power shortages, with the 
most recent period extending from mid 2001 to early 
¶2002.  Although new power plants are being added, the 
government is yet to procure sufficient base-load power 
to avert a power crisis in the medium term.  The JVP is 
resisting Government moves to restructure the state 
owned electrical utility, which reduces the possibility 
of solving the power problem in the foreseeable future. 
Increasing oil prices are also causing an already 
inefficient and money losing state-owned electrical 
company to face serious cash flow difficulties and 
renege on power purchase agreement commitments and 
contractual obligations.  Uncertainty over the future 
of the energy sector has led most businesses to install 
onsite generating capacity. 
 
--Board of Investment 
 
¶15.  The Board of Investment (BOI) (www.boi.lk), an 
autonomous statutory agency, is the primary government 
authority responsible for foreign investment.  The BOI 
acts as a facilitator for investment.  It is intended 
to provide "one-stop" service for foreign investors, 
including approval of projects, granting incentives and 
arranging services such as water, power, waste 
treatment and telecommunications.  The BOI also assists 
in obtaining resident visas for expatriate personnel 
and facilitates import and export clearance.  The BOI 
has undertaken a major review of its activities with 
the intention of improving its services. 
 
¶16.  The Bureau for Infrastructure Investment (BII) 
(www.boi.lk), a division of BOI, is assigned the 
responsibility to coordinate all private infrastructure 
projects.  Projects are usually structured on the basis 
of build, own, operate (BOO), build, operate, and 
transfer (BOT) or build, own, operate and transfer 
(BOOT). 
 
--Laws Affecting Investment 
 
¶17.  The principal law governing foreign investment is 
Law No. 4 of 1978 (known as the BOI Act), including 
amendments made in 1980, 1983 and 1992, and 
implementing regulations established under the Act. 
The BOI Act provides for two types of investment 
approvals.  Under section 17 of the Act, the BOI is 
empowered to grant concessions (see details below) to 
companies satisfying certain eligibility criteria. 
Investment approval under section 16 of the act permits 
entry for foreign investment to operate under the 
"normal" laws of the country and is applicable to 
investments that do not satisfy eligibility criteria 
for BOI incentives.  Other laws affecting foreign 
investment are the Securities and Exchange Commission 
Act of 1987, amendments made in 1991 and 2003 and the 
Takeovers and Mergers Code of 1995.  In addition, 
various labor laws and regulations affect investors. 
See sections below. 
 
--Foreign Equity and Sectors 
 
¶18.  Foreign equity participation of up to 100 percent 
is allowed in many sectors of the economy and the BOI 
gives automatic approval for most foreign investments. 
 
¶19.  The government relaxed investment rules in early 
2002, allowing 100 percent foreign investment in the 
following services: banking, finance, insurance, 
stockbroking, construction of residential buildings and 
roads, supply of water, mass transportation, 
telecommunications, production and distribution of 
energy, 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 non-discriminatory and, for the most part, routine. 
 
¶20.  Investment in some other sectors is restricted and 
subject to screening and approval on a case-by-case 
basis, where foreign equity exceeds 49 percent: 
shipping and travel agencies; freight forwarding; 
fishing; timber-based industries; growing and primary 
processing of tea, rubber, coconut, rice, cocoa, sugar 
and spices; and, finally, the production for export of 
goods subject to international quota.  Foreign 
investment restrictions and government regulations also 
apply to international air transportation; coastal 
shipping; lotteries; large-scale mechanized gem mining; 
and "sensitive" industries such as military hardware, 
dangerous drugs and currency. 
 
¶21.  Foreign investment is not permitted in the 
following businesses: non-bank money lending; pawn- 
broking; retail trade with a capital investment of less 
than $1 million (with one notable exception: the BOI 
permits retail and wholesale trading by reputed 
international brand names and franchises with an 
initial investment of not less than US$ 150,000); 
coastal fishing; and award of local university degrees. 
 
¶22.  In general, the treatment given to foreign 
investors is non-discriminatory.  In fact, some local 
companies have complained that they are discriminated 
against, as qualifying foreign investors can benefit 
from a wide range of advantages.  Even with incentives 
and BOI facilitation, foreign investors can face 
difficulties operating in Sri Lanka.  Problems range 
from the mundane, but critical, matter of clearing 
equipment and supplies through customs, to getting land 
for factories.  The BOI encourages investors to locate 
their factories in industrial processing zones managed 
by the BOI to overcome land allocation problems. 
Investors locating in industrial zones also get access 
to relatively better infrastructure facilities such as 
reliable power, telecommunication and water supplies. 
 
--Privatization 
 
¶23.  Previous governments, including one headed by the 
SLFP, actively pursued privatization.  When the UPFA 
(led by the SLFA) Government came to power in 2004, 
however, it pledged to halt the privatization process 
of strategic enterprises and institute more effective 
government oversight.  This was a concession to get JVP 
participation in its coalition.  Smaller government 
corporations are to be privatized. 
¶24.  Government treatment of foreign investors in the 
privatization process has been largely non- 
discriminatory.  In 2003, however, the government sold 
part of retail operations of state-owned Ceylon 
Petroleum Corporation (CPC) to Indian Oil Corporation 
(IOC) without a formal tender process.  One US firm, 
which had earlier acquired a government owned lubricant 
plant and obtained exclusivity in the sale of 
lubricants in CPC outlets until mid-2004, has also 
complained that the government had reneged on the terms 
of the exclusivity agreement.  Labor unions in the 
state-owned enterprises are often opposed to 
privatization and restructuring and seem particularly 
averse to foreign ownership.  In the past this has made 
the purchase of certain strategic entities problematic 
for new foreign owners.  Sometimes liberal and unwieldy 
concessions, not announced during the bidding process, 
were granted to investors, and other times substantive 
changes were introduced once the process had begun. 
 
--Investment Trends 
 
¶25.  Foreign direct investment flows to Sri Lanka have 
averaged only about $150 million per year (excluding 
privatization receipts) during 1998-2001.  Following 
the commencement of the peace process and improved 
investor confidence, annual foreign investment flows 
have averaged about $200 million.  Although initially 
FDI was expected to rise faster following the 
ceasefire, due to the stalemate in the peace process it 
has stagnated.  In 2004, FDI was about $233 million, 
according to the Central Bank.  FDI mainly funded 
telecommunications and manufacturing industries (cement 
and textiles).  Other major deals struck in 2004 
included a $30 million BPO center by the Hong Kong and 
Shanghai Banking Corporation Ltd (HSBC). 
 
¶26.  The Colombo Stock Exchange(CSE) has been growing 
markedly since 2002, due to local investor activity. 
In July 2004, Colombo was named the best performing 
market in Asia and the fifth best performing equity 
market in the world by Bloomberg.  The upsurge in 
stocks could be directly attributed to the ceasefire 
agreement and a rise in tourism stocks.  The market has 
also become attractive to local investors due to 
negative real interest rates.  A large IPO from a new 
Indian oil retail business in Sri Lanka also boosted 
the market heavily in December.  Despite the boom, 
foreign investors have largely stayed out of the 
market, and were net sellers in 2003-2004.  Uncertainty 
about the peace process, weak macro economic 
fundamentals and reversals in economic reforms are 
major concerns to foreign investors.  CSE is taking 
steps to broaden the investor base both in Sri Lanka 
and abroad. 
 
Conversion and Transfer Policies 
-------------------------------- 
 
¶27.  Sri Lanka has accepted Article VIII status of the 
IMF and has liberalized exchange controls on current 
account transactions.  In early 2001, in response to a 
fall in Sri Lanka's foreign exchange reserves, the 
Central Bank introduced temporary controls on foreign 
exchange transactions, which have since been removed. 
There are no surrender requirements on export receipts, 
but exporters need to repatriate export proceeds within 
120 days to settle export credit facilities.  Other 
export proceeds can be retained abroad.  Currently, 
contracts for forward bookings of foreign exchange are 
permitted for a maximum period of 360 days for the 
purposes of payments in trade and 720 days for the 
repayment of loans. 
 
¶28.  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. 
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.  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 in 2001, 2002 and 2004 which were opened 
to foreign investors.  It has been proposed to allow 
foreigners to invest in corporate debentures and 
government bonds. 
 
¶29.  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. 
 
Expropriation and Compensation 
------------------------------ 
 
¶30.  Since economic liberalization policies began in 
1978, the Sri Lankan Government has never been legally 
found to have expropriated a foreign investment.  Under 
the terms of the US/Sri Lanka Bilateral Investment 
Treaty (BIT), investors have the right to arbitration 
under the International Center for the Settlement of 
Investment Disputes (ICSID).  A longstanding dispute 
involving an alleged expropriation of a US company's 
investment was satisfactorily resolved during 1998 
after lengthy negotiations involving the company, the 
Sri Lankan Foreign Ministry, the Sri Lankan Attorney 
General and the US Embassy. 
 
Dispute Settlement 
------------------ 
 
--Legal System 
 
¶31.  Sri Lankan commercial law is almost entirely 
statutory.  The law was codified before independence in 
1948 and reflects the letter and spirit of British law 
of that era.  It has, by and large, been amended to 
keep pace with subsequent legal changes in the U.K. 
Until recently, the court system was largely free from 
government interference.  The judiciary is sometimes 
subjected to political influence.  Procedures exist for 
enforcing foreign judgments.  Litigation can be very 
time consuming.  Several important legislative 
enactments regulate commercial matters:  the Board of 
Investment Law, the Intellectual Property Act, the 
Companies Act, the Securities and Exchange Commission 
Act, the Banking Act, the Industrial Promotion Act and 
Consumer Affairs Authority Act.  Most of these laws 
were revised recently to meet current business 
practices. 
 
--Bankruptcy Laws 
 
¶32.  The Companies Act and the Insolvency Ordinance 
provide for winding up insolvent companies, but 
existing legislation hinders smooth re-organization. 
Currently, there is no mechanism to facilitate the re- 
organization of financially troubled companies.  The 
Termination Act, for example, prohibits employers from 
laying off workers even on the grounds of inefficiency. 
The Parliament has passed an amendment to the 
Termination Act to facilitate retrenchment, but its 
implementation was delayed until the development of a 
compensation formula and an unemployment insurance 
scheme for displaced workers.  After revisions and 
delays, the compensation formula was finally published 
in March 2005, but employers have protested as it is 
excessive compared to similar formulae in the Asian 
region.  The compensation plan could adversely affect 
restructuring plans of companies. 
 
¶33.  In the absence of proper Bankruptcy Laws, extra 
judicial powers granted to financial institutions by 
law protect the rights of  creditors and have helped to 
strengthen credit discipline.  Lenders are able to 
enforce financial contracts through powers that allow 
them to foreclose on loan collateral without the 
intervention of courts.  A recent judgment, however, 
ruled that these powers would not apply in respect of 
collateral provided by guarantors to a loan. Financial 
institutions also face other legal challenges as 
defaulters obtain restraining orders on frivolous 
grounds due to technical defects in the recovery laws. 
Also, for default cases that are filed in courts, the 
judicial process is time consuming.  The private sector 
has urged the government to introduce US Chapter 11- 
style Bankruptcy laws.  The financial community has 
requested strengthening of debt recovery laws. 
 
--Investment Protection 
 
¶34.  Foreign investments are, in principle, guaranteed 
protection by the constitution of Sri Lanka.  The 
government has entered into 24 investment protection 
agreements with foreign governments (including the 
United States) and is a founding member of the 
Multilateral Investment Guarantee Agency (MIGA) of the 
World Bank.  Sri Lanka is also a founding member of the 
World Trade Organization.  The government has ratified 
the provisions of the convention on Settlement of 
Investment Disputes, which provides the mechanism and 
facilities for international arbitration through the 
ICSID of the World Bank. 
 
¶35.  The US-Sri Lanka BIT was ratified by both 
governments in early 1993.  A bilateral treaty on 
avoidance of double taxation went into effect on June 
12, 2004. 
 
¶36.  Settlement of disputes through the Sri Lankan 
court system is subject to protracted and inexplicable 
delay.  Aggrieved investors (especially those dealing 
with the government of Sri Lanka on projects) have 
frequently pursued out-of-court settlements, which 
offer the possibility -- not frequently realized -- of 
speedier resolution of disputes. 
 
--Arbitration 
 
¶37.  The Arbitration Act of 1995 gives recognition to 
the New York Convention on recognition and enforcement 
of foreign arbitral awards.  Arbitral awards made 
abroad are now enforceable in Sri Lanka.  Similarly, 
awards made in Sri Lanka are enforceable abroad.  A 
center for arbitration known as the Institute for the 
Development of Commercial Law and Practice (ICLP) has 
been established in Colombo for the expeditious, 
economical and private settlement of commercial 
disputes.  The ICLP appears unlikely to become involved 
in disputes involving the Sri Lankan Government, the 
source of most disputes involving US companies 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 is 
still low. 
 
¶38.  The Labor Department has a process involving labor 
tribunals for settling industrial disputes with labor, 
and compulsory arbitration is available when attempts 
to reconcile industrial disputes fail.  The Parliament 
has passed an amendment to the Industrial Disputes Act 
to expedite labor dispute resolution through the Labor 
Tribunals of the Department of Labor.  The Labor 
Commissioner typically becomes involved in labor- 
management mediation.  Other senior officials, 
including the Labor Minister, and the President, have 
intervened in particularly difficult cases. 
--Investment Disputes Involving U.S. Companies 
 
¶39.  There continue to be trade and investment 
disputes, particularly surrounding government 
procurement.  The government procurement process in Sri 
Lanka is slow and non-transparent.  US Companies 
continue to face problems with payment on valid 
contracts, implementation on agreements with the 
Government and inexplicable failure to secure 
contracts, despite superior performance, high value and 
low bids.  Some US companies have found it difficult to 
secure payment for power generation due to CEB's tight 
cash flow situation. 
 
¶40.  In May 2000, the Sri Lankan Supreme Court 
effectively blocked an existing investment agreement 
between the Government of Sri Lanka and a US mining 
company.  Although the investment agreement was already 
initialed and approved by the Sri Lankan cabinet, work 
on the project had not yet begun.  A group of citizens 
filed a fundamental rights case, which under Sri Lankan 
law allows any person to seek protection from the 
Supreme Court in respect of infringement of a 
fundamental right by the government or by 
administrative action.  The plaintiffs alleged in this 
case that their rights would be violated by 
implementation of the mining project, and the court 
upheld their complaint.  Without any technical 
argument, a partial bench of 3 judges ruled that the 
project could not proceed before completion of a new 
series of detailed and highly comprehensive and 
expensive studies, some of which appear to be 
technically impractical.  Because this is a Supreme 
Court decision, options for reversing the decision 
appear limited. 
 
¶41.  In another case, a US investor with a substantial 
investment in an export manufacturing company has faced 
lengthy delays in a court case over a large insurance 
claim.  The company instituted legal action in June 
1999 and court proceedings are still ongoing.  The 
Company has wound up its operations in Sri Lanka 
recently.  In many disputes, defendants resort to 
obtaining injunctions, stay orders or postponements to 
drag cases on for years. 
 
Performance Requirements/Incentives 
----------------------------------- 
 
--Performance Requirements 
 
¶42.  The Board of Investment specifies certain minimum 
investment amounts for both local and foreign investors 
to qualify for incentives.  Firms enjoying preferential 
incentives in the manufacturing sector in most cases 
are required to export 80 percent of production, while 
those in the service sector must export at least 70 
percent of production.  Sri Lanka complies with WTO 
Trade Related Investment Measures (TRIMS) Obligations. 
 
¶43.  Foreign investment is encouraged in information 
technology, electronic assembly, light engineering, 
automobile parts and accessories manufacture, 
industrial and IT parks, rubber based industries, 
information and communication services, tourism and 
leisure related activities, agriculture and agro 
processing, port related services, regional operating 
headquarters and infrastructure projects.  Foreign 
investors are generally not expected to reduce their 
equity over time or to transfer technology within a 
specified period of time, except for build-own-transfer 
or other projects in which such terms are clearly 
specified. 
 
¶44.  Maintaining a certain level of employment is a 
condition in some BOI-approved enterprises.  In 
addition, privatization agreements as a rule prohibit 
new owners from laying off workers, although the owners 
are free to offer voluntary retirement packages to 
reduce their workforce.  Some foreign investors have 
received political pressure to hire workers from a 
particular constituency or a given list, but have 
successfully resisted such pressure with no apparent 
adverse effects. 
 
¶45.  Foreign investors who make an equity investment of 
$50,000 can qualify for a resident visa.  Employment of 
foreign personnel is permitted when there is a 
demonstrated shortage of qualified local labor. 
Technical and managerial personnel are in short supply, 
and this shortage is likely to continue in the near 
future.  Foreign employees attached to BOI-approved 
companies usually receive preferential tax treatment 
and do not experience significant problems in obtaining 
work or residence permits. 
 
--Investment Incentives 
 
¶46.  The Board of Investment has announced the 
following investment incentives: 
 
Incentive Program I 
 
Qualifying industries: 
--Non traditional manufacturing exports (excluding tea, 
rubber and coconut), and companies supplying to 
exporting companies.  Minimum investment of $150,000; 
--Export oriented services.  Minimum investment of 
$150,000; 
--Manufacture of industrial tools and/or machinery. 
Minimum investment of  $150,000; 
--Small scale infrastructure.  Minimum investment of 
$500,000; 
--Research and development.  Minimum investment of 
$50,000; 
--Agriculture and agro processing industries.  Minimum 
investment of $10,000; 
 
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). 
Exporting companies and export-oriented services will 
be exempted from exchange control regulations.  They 
will also qualify for free repatriation of profits and 
dividends and free transferability of shares.  A 
recently introduced Economic Service Charge at 0.25 
percent of income will be applicable to BOI approved 
companies with tax holidays, from the fourth year of 
operation. 
 
Incentive Program II 
 
Qualifying Industries: 
--Information technology services such as call centers, 
data entry services, data centers, software 
development, hosting centers of e-governance related 
projects (a); 
--IT training institutes (b); 
--Regional operating headquarters providing following 
services to related businesses outside Sri Lanka: 
sourcing raw materials, R&D, technical support, 
financial and treasury management, marketing and sales 
promotion; 
--Any industrial, agriculture, service, or construction 
activity approved by the BOI.  Minimum investment of $5 
million. 
(a) Minimum employment of 15 IT professionals is 
required in IT companies 
(b) Minimum 300 students required for IT training 
institutes. 
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 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. 
 
 
Infrastructure development: 
 
¶47.  Companies acquiring existing companies in 
petroleum, power generation, transmission, development 
of highways, sea ports, airports, railway, water 
services, public transport, agriculture and agro 
processing and other infrastructure projects approved 
by the BOI will qualify for tax holidays ranging from 5 
to 10 years depending on the magnitude of investment. 
A preferential tax of 15 percent will follow the tax 
holiday.  They will also qualify for duty free imports 
of capital goods.  Minimum investment of $12.5 million. 
 
¶48.  Large-scale infrastructure projects in power 
generation, transmission and distribution; development 
of highways, seaports, airports, public transport and 
water services; establishment of industrial parks, and 
other infrastructure projects approved by the BOI will 
qualify for tax holidays ranging from 6 to 12 years 
depending on the size of the investment.  A 
preferential tax of 15 percent will follow the tax 
holiday.  They will also qualify for duty free imports 
of capital goods. Minimum investment of $10 million. 
 
--Indo-Lanka Free Trade Agreement 
 
¶49.  A preferential trade agreement, the Indo Lanka 
Free Trade Agreement (ILFTA) (www.indolankafta.org), 
between Sri Lanka and India is in operation.  Under 
this 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).  The two countries have begun discussions on 
services sector liberalization, although no specific 
goals have been set yet. 
 
¶50.  Sri Lanka recently signed a free trade agreement 
with Pakistan.  These are seen as steps towards making 
Sri Lanka a regional hub and the gateway to South Asia 
and the Middle East for foreign investors. 
 
--Prospects for U.S. Investment under Indo Lanka Free 
Trade Agreement (ILFTA) 
 
¶51.  Foreign investors in Sri Lanka can enjoy 
preferential access to the Indian market, under the 
ILFTA.  Domestic value addition of 35 percent is 
required to qualify for concessions granted under the 
agreement.  The BOI hopes to attract foreign joint 
ventures to Sri Lanka under the ILFTA.  Indian imports 
amounted to over $49 billion in 2002.  The BOI's 
strategy is to identify products imported into India 
and to target its investment promotion efforts to 
countries and companies manufacturing them.  The US is 
one such country; the US accounts for about 7 percent 
of Indian imports valued at $5.5 billion in 2003-4.  A 
majority of these products would qualify for 
substantial duty concessions if exported from Sri Lanka 
under the ILFTA.  The BOI encourages US manufacturing 
companies and regional operating headquarters to 
relocate in Sri Lanka to benefit from ILFTA.  The BOI 
has identified the following sectors for investment 
promotion in the US:  electronics, light engineering, 
pharmaceuticals/cosmetics, information technology and 
financial services. 
 
¶52.  Currently, US companies avail themselves of this 
agreement adding 35 percent value in Sri Lanka and 
getting import duties into India reduced from as much 
as 40 percent to as little as zero. 
 
¶53.  For further information on investment incentives 
and other investment-related issues, potential 
investors are encouraged to contact the Board of 
Investment directly.  The BOI can be found at 
www.boi.lk, or reached via e-mail at info@boi.lk 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
¶54.  Private entities are free to establish, acquire 
and dispose of interests in business enterprises. 
Private enterprises enjoy benefits similar to those 
granted to public enterprises, and there are no known 
limitations on access to markets, credit or licenses. 
Foreign ownership is allowed in most sectors.  Private 
land ownership is limited to fifty acres per person. 
About 80 percent of the land in Sri Lanka is owned by 
the government, including most tea, rubber and coconut 
plantations.  The government has divested most of these 
plantations to the private sector on 50-year lease 
terms.  Although state land for industrial use is 
usually allotted on a 50-year lease, 99-year leases may 
also be approved on a case-by-case basis, depending on 
the nature of the project. 
 
¶55.  Foreign investors can purchase land from private 
sellers.  The government has re-imposed a 100 percent 
tax on land transfers to foreigners. 
 
Protection of Property Rights 
----------------------------- 
 
--Property rights 
 
¶56.  Secured interests in property are recognized and 
enforced.  A fairly reliable registration system exists 
for recording private property such as land, buildings 
and mortgages.  However, 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. 
 
¶57.  Private farmers are working state-owned lands 
under varying tenure agreements, ranging from 
restrictive tenures to land grants.  These lands have 
ill-defined property rights.  A World Bank-funded 
project is underway to develop a legal framework for 
implementing a titling system for land.  This will also 
remove restrictions related to the sale, leasing and 
transfer and mortgaging of rural lands previously 
distributed to farmers. 
 
¶58.  In 2004, the Government changed land ownership 
regulations, by re-imposing a 100 percent tax on land 
sales to foreigners, which was removed in 2002.  Under 
the previous version of this tax, foreign companies 
registered in Sri Lanka were considered local companies 
and were not subject to tax.  In its current form 
however, any company with 25 percent foreign ownership 
would be considered "foreign" for the purposes of the 
tax.  Apartments above the third floor of condominium 
buildings, land for the development of large housing 
schemes, hospitals, hotels, exporting companies with a 
minimum investment of USD 1 million and large 
infrastructure projects are to be exempted from the 
tax.  Foreigners maintaining $ 150,000 in a bank 
account in Sri Lanka will be given concessionary 
treatment.  Regulations regarding these exceptions are 
yet to be published.  In addition to the tax, the 
government has plans to prohibit certain geographical 
areas for purchase by non-citizens. 
 
--Intellectual Property Rights Protection 
 
¶59.  Sri Lanka is a party to major Intellectual 
Property Agreements including the Bern Convention for 
the protection of literary and artistic works, the 
Paris Convention for the protection of industrial 
property, the Madrid Agreement for the repression of 
false or deceptive indication of source on goods, the 
Nairobi Treaty, the Patent Co-operation Treaty, the 
Universal Copyright Convention and the Convention 
establishing the World Intellectual Property 
Organization (WIPO).  Sri Lanka and the US signed a 
Bilateral Agreement for the Protection of Intellectual 
Property Rights in 1991, and Sri Lanka is also a party 
to the Trade Related Intellectual Property Rights 
(TRIPS) Agreement in the World Trade Organization. 
 
¶60.  A new intellectual property law came into force in 
November 2003.  It meets both US-Sri Lanka bilateral 
IPR agreement and TRIPS obligations to a great extent. 
The IPR law governs copyrights and related rights, 
reproduction rights, public distribution rights, 
industrial designs, patents for inventions, trademarks 
and service marks, trade names, layout designs of 
integrated circuits, geographical indications, unfair 
competition, data bases, computer programs and 
undisclosed information.  The law also covers the 
rights of performers, producers of sound recordings and 
broadcasting organizations.  All trademarks, designs, 
industrial designs and patents must be registered with 
the Director General of Intellectual Property. 
 
¶61.  Infringement of Intellectual Property Rights (IPR) 
is a punishable offense under the law.  Intellectual 
Property Rights come 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 
importation and exports.  Police can take ex-officio 
action to enforce the law.  Aggrieved parties can also, 
on their own, seek relief redress of any IPR violation 
through the courts, which can be a frustrating and time- 
consuming process. 
 
¶62.  Although the legal system is well-established and 
non-discriminatory, it is fraught with long delays. 
Enforcement was a serious problem under the old law, as 
is public awareness of IPR.  Domestic implementing 
legislation, under the old law, was very weak and the 
government did not act as an enforcer of IPR laws. 
 
¶63.  With the passage of new law, Sri Lanka has begun 
to enforce IPR laws.  However, it will take time before 
new procedures and court precedents are established. 
In October 2004, Sri Lankan Police raided a previously 
unknown illegal CD manufacturing plant owned by 
Malaysian nationals.  The Police carried out additional 
raids of counterfeit CD/VCD stores in the first quarter 
of 2005.  The Customs has also seized counterfeit 
consumer goods, mainly cigarettes.  Meanwhile, local 
agents of reputed US and other international recording 
companies, software development companies, motion 
picture companies, clothing companies and consumer 
product companies continue to complain that lack of IPR 
protection is damaging their businesses.  The Embassy, 
along with key industry players including the IFPI, 
continues to lobby the government to improve Sri 
Lanka's IPR regime. 
 
¶64.  Sri Lanka needs to ratify and conform to the WIPO 
Performances and Phonograms Treaty (WPPT) and the WIPO 
Copyright Treaty (WCT).  Ratification of these two 
treaties will support electronic commerce, protect the 
rights of performers and producers of phonograms and 
the rights of authors in their literary and artistic 
works, and offer an adequate basis to fight 
international piracy in view of the new technological 
developments.  Sri Lanka also does not have provisions 
dealing with electronic transactions, electronic 
signatures, computer crimes and evidence.  The IPR law 
does not cover protection of new plant varieties. 
 
--Patents, Copy Rights and Trade Marks 
 
¶65.  Patents are granted for inventions, with the 
following exceptions:  discoveries, scientific theories 
and mathematical methods, plant or animal varieties 
(other than micro biological processes) and essentially 
biological processes for the production of plants and 
animals (other than non biological and microbiological 
processes), business rules and methods, methods of 
treatment by surgery or therapy, and diagnostic methods 
practiced on the human or animal body.  The law also 
permits compulsory licensing and parallel imports of 
pharmaceutical products.  The compulsory licensing will 
allow government to grant licenses to manufacture 
certain drugs, overruling patent licenses, in a 
national emergency.  The parallel imports will allow 
the import of a branded drug from an alternative 
source. 
 
¶66.  A patent is valid for 20 years from the date of 
application but must be renewed annually. 
 
¶67.  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. 
 
¶68.  Sri Lanka recognizes both trademarks and service 
marks.  The exclusive right to a mark is acquired by 
registration.  A mark may consist of words, slogans, 
designs, etc.  Protection also is available to well 
known marks not registered in Sri Lanka.  Registered 
trademarks are valid for ten years and renewable.  The 
law also recognizes both certification marks and 
collective marks. 
 
Transparency of the Regulatory System 
------------------------------------- 
 
¶69.  The BOI 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 in 
place.  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 bureaucratic 
discretion.  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.  Lethargy and indifference on the 
part of mid- and lower-level public servants compound 
transparency problems.  Non-availability of technical 
capacity within the government to review financial 
proposals for private infrastructure projects also 
creates problems during tendering. 
 
¶70.  Although many foreign investors, including US 
firms, have had positive experiences in Sri Lanka, some 
have encountered significant problems with government 
practices and regulations.  For example, one foreign 
company that had obtained a waiver of a particular 
requirement in order to obtain a license was later told 
it must meet the requirement to continue to be 
qualified for the license; with no advance warning and 
little justification.  Some multinational firms have 
experienced extensive unexplained delays in trying to 
reach agreement on investment projects.  Others have 
had contracts inexplicably canceled without 
compensation, even after those contracts had been 
approved by the Sri Lankan Cabinet. 
 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
--Availability of financial resources 
 
¶71.  Retained profits finance about 70 percent of 
private investment, with short term borrowing financing 
a further 20 percent of investment.  The stock market 
and corporate securities market have not been 
significantly used to raise capital.  FDI finances 
about 4 percent of investment. 
 
¶72.  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 rate volatility, due to 
excessive use of short term borrowing by the state, 
increased intermediation cost leading to higher costs 
to other borrowers.  Since 2002, the government policy 
has supported a low interest rate regime.  As a result, 
interest rates have fallen significantly and have given 
impetus to increased credit which has contributed to 
increased domestic investment.  The investment/GDP 
ratio rose to 25.3 percent in 2004 compared with 22 
percent in 2001.  The prime lending rate currently 
averages 9.8 percent compared with about 12.8 percent 
in December 2001.  Foreign investors are allowed to 
access credit on the local market.  They are also free 
to raise foreign currency loans. 
 
¶73.  A total of Rs 12.3 billion (approx. $123 million) 
was raised in the primary market by way of new equity 
and debt in 2004, reflecting the potential for 
companies to raise funds through the market. 
 
--Credit Instruments 
 
¶74.  Commercial banks and two development finance 
institutions, the National Development Bank (NDB) and 
the Development Finance Corporation of Ceylon Bank 
(DFCC), are the principal source of bank finance.  Bank 
loans are the most widely used credit instrument for 
the private sector.  Financial institutions such as the 
DFCC and some commercial banks also raise syndicated 
bank loans to fund large-scale investment projects 
undertaken by the private sector. 
 
¶75.  The domestic debt market in Sri Lanka is still at 
a very nascent stage.  The first credit rating agency, 
Fitch IBRC opened an office in Colombo in 1999, which 
has helped companies to raise funds through debt 
markets.  Fitch Rating Lanka Ltd, is a joint venture 
between Fitch IBRC, IFC, the Central Bank of Sri Lanka 
and several local financial institutions.  Credit 
ratings are now mandatory for all deposit taking 
institutions and for all varieties of debt instruments. 
 
--Accounting Standards 
¶76.  There is an active and relatively competent 
accounting profession, 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.  Due to 
the lack of an adequate enforcement mechanism, however, 
problems with the quality and reliability of financial 
statements exist.  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). 
 
¶77.  Sri Lanka accounting standards are applicable for 
all banks and companies listed on the stock exchange 
and all other large- and medium-sized companies in Sri 
Lanka.  Accounts of such business enterprises are 
required to be audited by professionally qualified 
auditors holding ICASL membership.  ICASL has recently 
published accounting standards for small companies as 
well.  Companies in Sri Lanka now have the choice of 
adopting International Financial Reporting Standards 
(IFRS) of the IASB.  The Accounting Standards and 
Monitoring Board (ASMB) is responsible for monitoring 
compliance with Sri Lanka accounting and auditing 
standards. 
 
--Securities and Exchange Commission 
 
¶78.  The 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 SEC now covers stock 
exchanges, unit trusts, stock brokers, listed public 
companies, margin traders, underwriters, investment 
managers, credit rating agencies and securities 
depositories. 
 
¶79.  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 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. 
 
¶80.  Sri Lanka's SEC was rocked by a scandal in early 
2003, tarnishing the image of the market watchdog.  The 
SEC Chairman and another leading businessman were 
implicated for insider dealing at a blue chip local 
conglomerate where they were both directors.  Initial 
attempts by the SEC secretariat to institute legal 
actions against the two were blocked by the SEC Board 
of Directors.  Later, the Attorney General ruled that 
the SEC Board had acted improperly, casting doubt on 
the board members' credibility.  The SEC Chairman 
resigned and pleaded innocence, subsequently.  Later 
the two parties came to an out of court settlement. 
 
¶81.  The SEC scandal has caused many to call for 
increased corporate governance and accountability in 
the private sector.  Some business consultants have 
asked for laws such as the US Sarbanes-Oxley Act to 
regulate financial services and professional services 
organizations. 
--Colombo Stock Exchange 
¶82.  The Colombo Stock Exchange (CSE), while small by 
"big emerging market" standards, is one of the most 
efficient in the region.  The CSE is fully automated, 
with automated trading and clearing and settlement 
systems.  The CSE has a rolling settlement period of 
five days for buyers and six days for sellers.  Fifteen 
local and foreign joint venture brokers currently 
operate at the CSE.  Foreign stock-brokers are 
permitted to hold up to 100 percent equity in stock 
broking firms operating at the CSE.  SEC has a 
settlement guarantee fund with an initial capital of Rs 
100 million ($1 million) which aims to guarantee the 
settlement of trades between clearing members of the 
exchange.  The Chartered Financial Analysts (CFA) 
program is conducted in Sri Lanka. 
 
¶83.  Acquisition of companies through mergers and 
takeovers is governed by the Takeovers and Mergers Code 
of 1995 made under the Securities and Exchange 
Commission of Sri Lanka Act.  This law applies only to 
companies listed on the Colombo Stock Exchange.  It is 
modeled on the lines of the London City Code on 
Takeovers and Mergers.  Acquisition of more than a 30 
percent stake of a listed company requires the buyer to 
make an offer to all other shareholders.  The articles 
of association of a few listed companies restrict 
foreign equity to certain levels. 
 
¶84.  There are 242 companies listed on the stock 
exchange and the top ten positions by market 
capitalization are held by banks and food and beverage 
companies.  In 2003-2004, 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.  During 
1998-2001, the Colombo Stock Market experienced a sharp 
downturn due to a variety of local and international 
factors.  As a result, the CSE was removed from the 
Morgan Stanley Capital International (MSCI) Index in 
¶2001.  It has not been reclassified in the MSCI yet, 
despite recent surge driven mainly by locals.  In April 
2005, however, the California Public Pension Fund 
(CALPERS) rated Sri Lanka as investment grade for 
CALPERS Investment.  As of early May 2005, however, no 
CALPERS funds had been invested. 
 
¶85. The single overriding factor inhibiting the 
sustainable development of the stock market has been 
the 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.  The Accounting and Auditing Standards 
Monitoring Board, the Ceylon Chamber of Commerce, the 
Colombo Stock Exchange and professional accounting 
bodies are taking initiatives in these areas. 
 
--Banking System 
 
¶86.  Sri Lanka has a fairly well diversified banking 
system.  There are 22 commercial banks, consisting of 
eleven local banks and eleven foreign banks.  In 
addition, there are thirteen local specialized banks. 
Citibank NA is the only US bank operating in Sri Lanka 
and has expanded its operations recently.  In 2001- 
2003, Mashreq Bank, American Express Bank, Nova Scotia 
Bank and ABN Amro Bank sold their banking operations in 
Colombo to existing banks.  Sri Lanka experienced its 
first bank failure in December 2002 when the Central 
Bank took action to revoke the license of a small 
licensed specialized bank as its financial condition 
deteriorated to insolvency.  There has not been any 
fallout for other banks from this incident.  Two other 
small troubled banks were restructured under Central 
Bank guidance.  In April 2005, the Central Bank 
introduced higher capital requirements for commercial 
banks in a bid to enhance the banking system stability, 
promote consolidation and facilitate entry of larger 
banks. 
 
¶87.  The Central Bank is responsible for supervision of 
all banking institutions.  Wide-ranging improvements 
have been made in banking regulation and in public 
disclosure of banking sector performance.  In 2002 the 
Monetary Law Act (MLA) was amended to provide 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 introduce guidelines to check the suitability of 
bank directors.  The amended Banking Act outlaws 
pyramid type programs.  Further amendments to the laws 
are also expected in the next two years under ongoing 
financial and legal reforms programs. 
 
¶88.  In 2004, the Central Bank introduced technical 
improvements to facilitate banking sector efficiency by 
establishing a Real Time Gross Settlement (RTGS) system 
and a Scriptless Securities Settlement (SSS) system. 
They have improved the efficiency and the safety of the 
country's payment and settlement systems and will 
facilitate trading of government securities. 
 
¶89.  Central Bank supervision as well as auditing 
practices of private audit firms came under criticism 
after the 2002 specialized bank failure mentioned 
above.  The Central Bank obtained the services of an 
international expert to strengthen bank supervision in 
¶2004. 
 
--State Owned Banks 
 
¶90.  Total assets of the commercial banks stood at Rs 
885 billion ($8.8 billion) as of December 31, 2003. 
Bank of Ceylon and People's Bank with assets of Rs 266 
billion ($2.7 bn) and Rs 224 billion ($2.2 billion), 
respectively in 2004, still dominate banking, making up 
about half of all assets. 
 
¶91.  The financial profile of both state banks 
deteriorated over the years, mainly as a result of 
directed lending and operating inefficiencies.  Since 
most of the bad debt of the two banks was implicitly 
guaranteed by the state, these problems did not affect 
the credibility of the banking system in Sri Lanka. 
The government re-capitalized these banks during the 
1990's.  The weaknesses in the state banks, however, 
make it possible for other inefficient banks to operate 
and for the more efficient banks to make higher profits 
than they would otherwise.  The World Bank and IMF have 
identified the dominance of the inefficient state banks 
as a main constraint for development of the financial 
sector.  Consequently, the government has been trying 
to reorganize the banks.  Both banks launched 
restructuring exercises to return to commercial 
viability in the medium term.  Top management at both 
Bank of Ceylon and People's Bank now contains private 
sector personnel and the banks were granted greater 
autonomy.  Further, asset classification and 
provisioning norms have been progressively 
strengthened.  While Bank of Ceylon has met most of the 
restructuring targets and shows substantial 
improvements in its financial profile, the situation at 
People's Bank remains weak.  In particular, the 
provisioning has left the bank with a large negative 
equity affecting its operations.  In addition, loans to 
Government corporations could again badly affect the 
bank's liquidity. 
 
¶92.  The Cabinet has recently approved new business 
development plans for the two state banks to make them 
more viable.  The plans were developed under the 
guidance of SEMA, the high powered restructuring agency 
of the Government.  The plan for Bank of Ceylon aims to 
increase its profitability and efficiency.  In case of 
People's Bank, the state is to re-capitalize the bank, 
for the third time, to meet a capital shortfall of Rs 
10 billion.  The latest capitalization is to be 
supported by an ADB program, which will see equity 
funding over 3 years.  ADB funding will be subject to 
meeting performance targets on non performing loans, 
profitability, cost, and capital adequacy.  The new 
plan signifies a departure from the earlier IMF agreed 
plan to sell the bank under a restructuring program. 
 
--Private Commercial Banks and Foreign Banks 
 
¶93.  Private commercial banks and foreign banks 
operating in Sri Lanka generally follow more prudent 
credit policies and as a group are in better financial 
shape.  Nonetheless, the private banking sector also 
remains trapped with a high level of non-performing 
loans, despite high margins.  In 2002, the average rate 
of non-performing loans to total loans was 19 percent 
for the two state commercial banks, 15.3 percent for 
private domestic banks and 12.1 percent for foreign 
banks operating in Sri Lanka.  There are concerns 
regarding inadequate loan loss provisioning and low 
operational efficiency in some local private banks. 
The banks are expected to improve provisioning with the 
introduction of new provisioning rules by the Central 
Bank in 2004.  Foreign banks tend to make provisions in 
line with international best practices as most foreign 
bank branches are subject to home country supervision 
in addition to that of the Central Bank of Sri Lanka. 
To help improve bank performance, an Asset Management 
Company Law is being prepared with World Bank and IMF 
assistance.  The law aims to provide troubled banks 
with a mechanism to effectively deal with their non- 
performing loans. 
 
¶94.  Credit ratings are mandatory for all banks 
operating in Sri Lanka from January 2004. 
 
--Capital Adequacy 
 
¶95.  Sri Lanka adopted capital adequacy standards set 
by the Basel Committee on banking regulations and 
supervisory practices in 1993.  The Central Bank has 
raised the minimum capital adequacy standards from 4.5 
to 5 percent for core capital (Tier I) and from 9 to 10 
percent for risk weighted assets (Tier I and Tier II) 
from January 2003.  Further enhancing banking sector 
stability, Central Bank has also imposed capital 
adequacy standards on foreign currency banking units. 
In addition, in keeping with Basel Core Principles on 
effective banking supervision, compliance with Capital 
Adequacy on a consolidated basis was introduced in 
¶2003. 
 
¶96.  People's Bank does not meet Capital Adequacy 
Requirements (CAR) of Sri Lanka but it has Ministry of 
Finance guarantee for funds required to meet 
requirements.  Bank of Ceylon Tier I CAR was about 12.1 
percent in 2003.  Current data on average Capital 
adequacy of private commercial banks is not available, 
but most of them maintain CA at required levels.  CA at 
foreign commercial Banks usually exceeds required 
levels. 
 
Political Violence 
------------------ 
 
¶97.  Since early 2002, there has been a marked 
improvement in the business climate due to the peaceful 
atmosphere prevailing in the country.  This is in 
contrast to the period between 1983-2001 when the 
country was plagued by ethnic conflict, a civil war and 
related urban terrorism.  The fighting between the 
Liberation Tigers of Tamil Eelam (LTTE) and the Sri 
Lankan military was primarily in northern and eastern 
Sri Lanka, but other parts of the country suffered 
sporadic terrorist attacks.  Since 1997, the LTTE has 
been on the US State Department list of foreign 
terrorist organizations.  Terrorist activities of the 
LTTE have declined significantly since late 2001 when 
the LTTE declared a unilateral cease-fire and signed a 
formal open-ended cease-fire agreement on February 22, 
2002 with the hope of ending the war.  Following, six 
rounds of peace talks with the government of Norway 
acting as facilitator, the LTTE suspended its 
participation in the peace talks in April 2003. 
 
¶98.  There have been many ceasefire violations, and an 
uptick in violence, mostly in the eastern part of the 
country, related to fighting between the LTTE and a 
faction that split from the LTTE in 2004.  In July 
2004, there was a suicide bombing in a Colombo police 
station following a failed assassination attempt 
against an anti-LTTE Tamil minister.  Five people 
(including the bomber) were killed.  Despite these 
incidents, the ceasefire largely holds and both sides 
have publicly committed to its maintenance.  Optimism 
remains as neither side sees an advantage in returning 
to war. 
 
¶99.  During the almost 19 years of war, tourists and 
foreign business representatives have not been 
terrorist targets but have suffered collateral injury 
during attacks on other targets.  On July 24, 2001 the 
LTTE attacked the international airport and destroyed 
both commercial and military aircraft.  Several 
military personnel were killed in the attack, military 
and airport employees were injured, and civilians were 
caught in crossfire.  Sri Lankan Airlines, jointly 
owned by the Government of Sri Lanka and Emirates 
Airlines of Dubai, lost several commercial aircraft in 
the attack.  The LTTE has also attacked several 
commercial ships flying foreign flags in the waters off 
the north and east of the country.  In response to 
these attacks, insurers imposed war risk insurance 
surcharges on aircraft and ships using Sri Lankan 
seaports and airports.  These surcharges have since 
been lifted.  During the conflict, the LTTE also 
detonated several large bombs in Colombo's financial 
and business districts causing numerous casualties and 
extensive damage to property.  Very few foreigners were 
injured in these terrorist incidents due to the LTTE's 
policy of targeting local interests.  There have been 
no major attacks since the peace process began on 
December 24, 2001.  The LTTE has been implicated in the 
slayings of several anti-LTTE politicians and police 
informants of Tamil heritage since the signing of the 
ceasefire.  There have also been several violent 
incidents at sea. 
 
Corruption 
---------- 
 
¶100.  The country has fairly adequate laws and 
regulations to combat corruption, but they are unevenly 
enforced. US firms identify corruption as a constraint 
on foreign investment, but, by and large, it is not a 
major impediment to operating in Sri Lanka.  According 
to Transparency International (TI), corruption is most 
pervasive in terms of political appointments to 
government institutions, in government procurement, and 
in high frequency low value transactions.  Police and 
the judiciary are perceived to be the most corrupt 
public institutions.  Corruption is a persistent 
problem in customs clearance and enables wide-scale 
smuggling of certain consumer items, to the detriment 
of legitimate manufacturers and importers.  Corruption 
appears to have the greatest effect on investors in 
large projects as well as government procurement and 
tendering, especially in previous defense purchases. 
 
¶101.  The law states that giving or accepting a bribe 
(by a public official) is 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.  The Bribery Commission is the main 
body responsible for investigating allegations of 
bribery and corruption.  The function of the Bribery 
Commission, under Act No 19 of 1994, is to investigate 
allegations brought to its attention and institute 
proceedings against responsible individuals in the 
appropriate court.  The Commission's most recent term 
expired in December 2004, and a new Commission was 
appointed after a 3-month delay in March 2005.  The 
previous Commissions were not effective in dealing with 
bribery or corruption. 
 
¶102.  Few have been found guilty of corruption in 
recent years.  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, no politician 
or senior government official has been convicted of 
bribery yet.  The Commission began investigating 
corruption charges against the former deputy minister 
of defense in 2002, but he is yet to be prosecuted.  In 
December 2004, the commission filed corruption charges 
in courts against another former key minister (who ran 
the Ministry in charge of public welfare). 
Prosecutions and investigations against some former 
senior public officials are moving slowly or have come 
to an abrupt end. 
 
¶103.  Sri Lanka ratified the UN Anticorruption 
Convention in March 2004.  Sri Lanka has signed but not 
ratified the UN Convention against Transnational 
Organized Crime.  Sri Lanka is not a signatory to OECD- 
ADB Anti Corruption Regional Plan. 
 
¶104.  Transparency International (TI), an international 
"watchdog" organization promoting anti-corruption 
strategies runs a national chapter in Sri Lanka.  In 
TI's Corruption Perception Index for 2004, Sri Lanka 
was ranked 67 among 146 countries with a score of 3.5 
out of a clean score of 10, reflecting a relatively 
high-perceived level of corruption among politicians 
and public officials.  TI's 2003 National Integrity 
Systems Country Report recommends the establishment of 
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. 
 
¶105.  In terms of Economic Freedom, Sri Lanka is ranked 
78 out of 123 countries in Canada's Fraser Institute's 
Economic Freedom of the World ranking released in 
August 2004.  Sri Lanka earned a score of 6 out of 10 
in the Economic Freedom Index.  This ranking is derived 
on the basis of 21 components categorized under 5 major 
indictors. 
 
Bilateral Investment Agreements 
------------------------------- 
 
¶106.  The Government of Sri Lanka has signed Investment 
Protection Agreements with the United States (which 
came into force in May 1993) and the following 
countries: 
 
¶1.  Belgium 
¶2.  People's Republic of China 
¶3.  Denmark 
¶4.  Egypt 
¶5.  Finland 
¶6.  France 
¶7.  Germany 
¶8.  Indonesia 
¶9.  India 
¶10. Iran 
¶11. Italy 
¶12. Japan 
¶13. Korea 
¶14. Luxembourg 
¶15. Malaysia 
¶16. Netherlands 
¶17. Norway 
¶18. Romania 
¶19. Singapore 
¶20. Sweden 
¶21. Switzerland 
¶22. Thailand 
¶23. United Kingdom 
 
¶107.  A bilateral treaty on avoidance of double 
taxation between Sri Lanka and the United States was 
ratified and entered into force on June 12, 2004. 
 
¶108.  Foreign investors not qualifying for BOI 
incentives such as tax and exchange control exemptions 
or concessions will be liable to pay taxes on corporate 
profits, dividends, and remittance of profits.  They 
will also be liable to pay a 15 percent Value Added Tax 
on goods and services.  The government has also imposed 
a tax of 0.1 percent on debits to any current or 
savings account maintained at any bank in Sri Lanka. 
Debits made to accounts of government and international 
organizations are excluded.  Accounts maintained at 
Foreign Currency Banking Units, accounts maintained for 
stock exchange transactions (SIERA) and resident and 
non-resident foreign currency accounts are exempted 
from the tax.  The Embassy encourages prospective US 
investors to contact an international auditing firm 
operating in Sri Lanka to assess their tax liability. 
 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
 
¶109.  The US and Sri Lanka concluded in 1966 (and 
renewed in 1993) an agreement that allows the Overseas 
Private Investment Corporation (OPIC) to provide 
investment insurance guarantees for US investors.  OPIC 
currently provides coverage to banking and power sector 
investments in Sri Lanka.  Sri Lanka's membership in 
the Multilateral Investment Guarantee Agency (MIGA) 
offers the opportunity for insurance against 
non-commercial risks. 
 
¶110.  Over $21 million is spent annually by the US 
Embassy and other US Government institutions in Sri 
Lanka.  This amount can potentially be utilized by OPIC 
to honor an inconvertibility claim; however, no such 
claims have been made to date in Sri Lanka.  The 
Embassy purchases local currency at the financial rate. 
The Sri Lankan Rupee has fluctuated against major 
foreign currencies during past 12 months.  The currency 
is not expected to fluctuate by more than 10 percent 
relative to the US dollar over the next year. 
 
Labor 
----- 
 
--Labor Force 
 
¶111.  Sri Lanka's labor force is literate and 
trainable, although weak in certain technical skills 
and English language.  More computer and business 
skills training programs, and English language programs 
are becoming available, but the demand still outpaces 
supply and many qualified workers seek employment 
overseas.  The average worker has eight years of 
schooling. 
¶112.  Two-thirds of the labor force is male.  The 
unemployment rate (employment is defined as one who 
worked for pay, profit or unpaid family gain for one or 
more hours during the survey week) in the first quarter 
of 2004 was 8.1 percent, with an estimated 650,000 of a 
total labor force of 7.9 million out of work.  (Labor 
force data excludes some areas in the Northern 
province; armed forces personnel deployed away from 
home and Sri Lankan migrant workers abroad.)  Including 
unpaid family workers, the unemployment rate is higher. 
Youth and entry level unemployment 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 at the Ordinary- 
Level (British System equivalent of US 10th grade) or 
higher.  Underemployment is also a major problem, with 
thousands of university graduates seeking places in the 
already bloated public sector, and lacking skills 
needed in the private sector. 
 
¶113.  A significant proportion of unemployed seek 
"white collar" jobs, and most sectors facing labor 
shortages offer manual or semi-skilled jobs or require 
technical or professional skills such as management, 
marketing, information technology, accountancy and 
finance, and English language.  Following election 
pledges during April 2004 parliamentary elections, the 
government has initiated several programs to expand 
state sector employment.  For instance, a graduate 
employment program is expected to provide about 40,000 
new jobs in the government sector. 
 
¶114.  The government has recognized the challenge of 
reformulating the educational system to meet the needs 
of the private sector better, but it will take time 
before the mismatch of skills to requirements is 
addressed.  The Asian Development Bank and the World 
Bank have recently approved projects to improve 
distance learning and tertiary education.  The private 
sector is offering various well-recognized professional 
study courses accredited to local and foreign 
professional institutes and foreign universities. 
However, access to these courses is limited due to high 
fees involved.  A fair number of Sri Lankan students 
also proceed abroad for studies. 
 
--Migrant Workers Abroad 
 
¶115.  There are an estimated 970,000 Sri Lankan workers 
abroad.  The majority of Sri Lankan workers abroad are 
unskilled (housemaids and laborers) and are located 
primarily in the Middle East.  Sri Lanka is also losing 
many of its technically and professionally qualified 
workers to more lucrative jobs abroad. 
 
--Labor Regulations, Cost of Labor 
 
¶116.  Labor is available 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 though child labor 
occurs in informal sectors.  The minimum legal age for 
employment is set at 14.  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.  The Termination of 
Employment 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.  The labor tribunals 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. 
¶117.  There is widespread belief that the labor laws 
and a plethora of holidays are dampening productivity. 
The full moon day of each month (sacred to Buddhists), 
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.  The statutory 
holidays are in addition to 21 days annual/casual leave 
and approximately 21 days sick leave (number of days 
for sick leave is at the discretion of the management). 
In addition, 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.  Female workers are permitted 60 hours of 
overtime work per month. 
 
--Termination laws 
 
¶118.  The Termination of Employment Act (TEA) makes it 
difficult to fire or lay off workers.  In January 2003, 
under the previous government's labor reform agenda, 
the Parliament passed amendments to the TEA and the 
Industrial Disputes Act (IDA) to improve labor 
mobility.  The amendments to TEA seek to facilitate 
termination and provided for a standard compensation 
formula and an unemployment benefit scheme.  Amendments 
to the IDA included time-bound labor dispute resolution 
rules to expedite labor dispute resolution.  The 
implementation of these new laws was delayed until the 
establishment of a new compensation formula and a new 
unemployment insurance scheme, which were finally 
announced in March 2005.  The compensation formula 
takes into account the number of years of service and 
offers 2.5 months salary as compensation for 5 years; 
22.5 months for 10 years; and up to a maximum of 48 
months salary for 34 years service.  In addition, an 
unemployment benefit insurance scheme would provide 12 
months salary.  Employers have shown reluctance to 
accept this formula and 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. 
 
¶119.  Other planned reforms include amendments to the 
Shop and Office Act to allow female employees in the IT 
sector to work in the night.  A more systematic 
overhaul of the TEA and IDA would help to bring labor 
laws in line with international norms. 
 
--Trade Unions 
 
¶120.  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. 
 
¶121.  Unions have complained that the BOI and some 
employers, especially in the BOI-run export processing 
zones (EPZ), prohibit union access and do not register 
unions on a timely basis.  Employers allege that the 
Janatha Vimukthi Peramuna (JVP), a Marxist political 
party now in government, could provoke labor to strike 
in the guise of trade union activity.  Due to its 
violent past, employers are generally not in favor of 
the JVP and its trade union arm, the Inter-Company 
Trade Union. 
 
¶122.  The Government continues to take steps to improve 
enforcement of labor regulations inside export 
processing zones (EPZs).  In BOI enterprises, including 
those in the EPZs, worker councils composed of 
employees generally provide for labor and management 
negotiations.  These worker councils have worked well 
in some companies to provide for worker welfare.  The 
BOI has requested companies to recognize trade unions 
and the right to collective bargaining.  According to 
the BOI, where both a recognized trade union with 
bargaining power and a non-union worker council exist 
in an enterprise, the trade union will represent the 
employees in collective bargaining. 
 
¶123.  The ILO Freedom of Association Committee, has 
observed that trade unions and employee councils can co- 
exist, but there should not be any discrimination 
against those employees choosing to join a union.  The 
right of employee councils to engage in collective 
bargaining has been held as valid by the ILO.  The ILO 
has, however, noted weaknesses in rules governing 
operation of employee councils and low prevalence of 
collective bargaining agreements and requested the 
Government to carry out improvements. 
 
¶124.  In response to these observations, the BOI 
revised its labor manual in March 2004, requesting 
companies located in EPZs to allow union access to 
zones, and provide official time off to union members 
to attend meetings.  Along with this revision, the BOI 
also issued new guidelines for the formation and 
operation of employee councils giving powers to 
employee councils to negotiate binding collective 
agreements. 
 
¶125.  In 2002, the American Federation of Labor and 
Congress of Industrial Organizations (AFL-CIO) 
submitted a petition to the United States Trade 
Representative seeking suspension of GSP benefits for 
Sri Lanka due to labor right violations in some 
factories in the export processing zones.  This 
petition was not acted upon.  A similar submission was 
made to the EU by a local trade union when Sri Lanka 
applied for benefits under the special incentive 
arrangements of the GSP.  After an audit, the EU in 
January 2004, granted significant benefits to Sri Lanka 
under EU GSP in recognition of country's efforts to 
implement core labor standards as the audit did not 
find serious problems with regard to core labor 
standards.  The EU, however, observed the need for 
further improvements in freedom of association. 
 
¶126.  In the plantation sector, union participation 
rates are as high as 75 percent, though unionization 
levels are reportedly on the decline.  Key public 
sector entities such as the Ceylon Electricity Board 
and Sri Lanka Ports Authority also have large unions, 
which stage protests, often to obtain pay hikes and 
sometimes 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.  In 
what is seen as a positive development, several trade 
unions with affiliations to main 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. 
 
¶127.  The growing strength of Marxist parties in active 
politics and in parliament has increased politicized 
union activity.  State agencies with large unionized 
workforces; have become vulnerable to politically 
motivated strikes in response to restructuring and 
privatization. 
--Collective Bargaining 
 
¶128.  Collective bargaining is not yet popular. 
Currently, about 50 companies (including a number of 
foreign-owned firms) belonging to the Employers' 
Federation of Ceylon (EFC) have collective agreements 
and use them to conduct negotiations on their behalf. 
More than half of EFC's 435 strong membership is 
unionized. 
--Labor-Management Relations 
 
¶129.  Labor-management relations in the past have been 
by and large confrontational.  This is due to a failure 
on the part of both unions and employees to recognize 
the need for a social partnership for mutual benefit. 
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.  Labor- 
management relations vary from organization to 
organization; managers who emphasize communication with 
workers and offer training opportunities generally 
experience fewer difficulties.  US investors in Sri 
Lanka (including US garment buyers) generally promote 
good labor management relations and labor conditions 
that exceed local standards.  A few large Sri Lankan 
firms have started Employee Share Option plans.  Work 
stoppages and strikes in the private sector have been 
on a decline in the past six months.  Civil servants 
other than officers in the police, armed forces, and 
prison service, also have a right to strike. 
 
--ILO conventions 
 
¶130.  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 core labor conventions included in 1998 ILO 
Declaration on Fundamental Principals 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 a 
Decent Work Agenda in Sri Lanka. 
 
Foreign Trade Zones 
------------------- 
 
¶131.  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.  The third zone is located 
at Koggala on the southern coast.  Several new mini 
export-processing zones were opened in the provinces 
during the last few years.  There are nearly 200 
foreign export processing enterprises operating in 
these zones.  There are also two industrial parks that 
have both export-oriented and non-export oriented 
factories.  They are located in Pallekelle, near Kandy 
in central Sri Lanka and in Seethawaka in Avissawela 
about 60 kilometers from Colombo. 
 
¶132.  In the past, industrialists preferred to locate 
their factories in close proximity to Colombo harbor or 
airport to reduce transport cost and save time.  The 
excessive concentration of industries around Colombo 
has created problems such as scarcity of labor, 
inadequate infrastructure, environmental pollution, 
escalation of real estate prices and congestion in the 
city.  Now, the BOI actively encourages the 
establishment of export-oriented factories in the newly 
developed industrial zones.  The BOI also finds it 
easier to provide infrastructure facilities and 
security, as well as to monitor enterprises, when they 
are located in the zones. 
 
Foreign Direct Investment 
------------------------- 
 
--US Investments 
 
¶133.  Major US companies with investments in Sri Lanka 
include:  Energizer Battery, Mast Industries, Smart 
Shirts (a subsidiary of Kellwood Industries), Caltex, 
Sportif, Citibank, Gtech, Caterpillar, 3M, Cargill, 
Coca Cola, Celetronix, Inc, Paxar Corp, Pepsi Co, 
Warburg Pincus, Worldquest, Fitch IBCR, AES 
Corporation, American International Group (AIG) and 
American Premium Water.  In addition, IBM, Lanier, NCR, 
GTE, Motorola, Procter & Gamble, Liz Claiborne, May 
Department Stores, Federated Department Stores, Tommy 
Hilfiger, J.C. Penney, the Gap, Sun Microsystems, 
Microsoft, Bates Strategic Alliance, McCann-Erickson, 
Pricewaterhouse Coopers, Ernst and Young and KPMG all 
have branches, affiliated offices or local 
distributors/representatives.  Kentucky Fried Chicken, 
Pizza Hut, Federal Express, UPS, and McDonald's are 
represented in Sri Lanka through franchises.  Numerous 
other American brands and products are represented by 
local agents. 
 
¶134.  US investment in Sri Lanka is estimated to be in 
the range of $200 million.  Among the recent investors 
in the power sector are AES Corporation and 
Caterpillar.  AIG insurance entered Sri Lanka in 1999. 
Others are expanding, such as Celetronix Inc (memory 
boards), Citibank, and Mast Inc (apparel and related 
products).  During the past few years, several US 
companies have formed joint ventures or other 
partnerships with Sri Lankan companies in the IT 
sector, mainly in software development. 
 
--Non-US Investments 
 
¶135.  Major non-US investors include: Unilever, 
Nestle's, British American Tobacco Company, Mitsui, 
Pacific Dunlop/Ansell, Prima, FDK, Telekom Malaysia Bhd 
and S.P. Tao.  Leading US and foreign investors which 
have acquired significant stakes in privatized 
companies include Caltex; Norsk Hydro of Norway; and 
Hanjung Steel of Korea; Nippon Telephone and Telegraph, 
Mitsubishi Corporation and C. Itoh (A.K.A. Itochu) of 
Japan; Emirates Airlines of United Arab Emirates; Shell 
Oil of the UK; P&O Netherlands and the Indian Oil 
Corporation (IOC) 
 
¶136.  Reliable statistics on foreign investment by 
country are not available.  Leading sources of foreign 
investments are South Korea, Japan, US, Australia, Hong 
Kong, Singapore, and the U.K.  FDI in 2004 was about 
$33 million. 
 
     Investment Statistics 
 
Estimated total foreign investment by sector 
(in $ millions) 
 
Sector                   Cumulative 
                         Total End 2003 
--------------------------------------- 
Food and beverage              98 
Textile/apparel, leather      268 
Chemical, rubber, plastic     151 
Non-met. Mineral Products      52 
Fabricated metal machinery     64 
Other manufactured products   104 
Services                    1,126 
---------------------------------------- 
Total                       1,867 
---------------------------------------- 
Source: Board of Investment of Sri Lanka 
Note: Investment figures reported here consist of 
direct investment plus loan financing.  The data 
provided by the BOI are incomplete.  They do not 
include foreign investment that came through non-BOI 
sources prior to 1994.  Foreign investment in the 
banking and insurance sectors are also not included. 
 
Lunstead