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C O N F I D E N T I A L SECTION 01 OF 03 COLOMBO 002013 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR SCA/INS 
MCC FOR D NASSIRY AND E BURKE 
 
E.O. 12958: DECL: 11/30/2016 
TAGS: ECON EFIN EINV EAID PGOV PREL PTER PHUM CE
SUBJECT: SRI LANKA: DEPUTY USTR URGES PRESIDENT TO IMPROVE 
INVESTMENT CLIMATE 
 
 
Classified By: Ambassador Robert O. Blake, Jr., for reasons 1.4(b,d). 
 
¶1.  (C) SUMMARY: Sri Lankan President Mahinda Rajapaksa, in a 
meeting on November 30, asked Deputy U.S. Trade 
Representative Karan Bhatia to help facilitate completion of 
a Millennium Challenge Compact for his country.  Rajapaksa 
made it clear that Sri Lanka was prepared to drop 
controversial irrigation projects in favor of alternative 
infrastructure projects such as roads.  Bhatia urged 
Rajapaksa to take measures to improve Sri Lanka's investment 
climate, including legal protections for investors.  The 
single greatest deterrent to U.S. investment in the country 
was the sense of instability stemming from the continued 
ethnic conflict, he noted.  Ambassador Blake reiterated the 
need for military restraint and improvement in the 
government's human rights record, absent which the U.S. could 
be obliged to withhold military assistance.  Bhatia thanked 
Sri Lanka for its efforts in the Doha round to date, 
commenting that the U.S. hoped that progress on agriculture 
would lead to overall success in the WTO negotiations.   End 
summary. 
 
NEED FOR MILITARY RESTRAINT, IMPROVEMENT IN HUMAN RIGHTS 
--------------------------------------------- ----------- 
 
¶2.  (C) Ambassador Blake began the discussion with a brief 
readout of the Washington Co-Chairs meeting on November 
20-21.  He told President Rajapaksa that the Co-Chairs were 
concerned about the downward spiral of violence in Sri Lanka. 
 However, the Co-Chairs placed great hope in the agreement 
between the two major Sinhalese parties to cooperate on 
developing a viable peace proposal that could form the basis 
for peace talks with the LTTE. 
 
¶3.  (C) Ambassador also mentioned the strong statement of 
support for Sri Lanka given by U/S Burns at the conclusion of 
the Co-Chairs meeting.  Rajapaksa nodded vigorous agreement 
and expressed appreciation for the support.  He thanked the 
Ambassador for his widely publicized rebuttal of LTTE chief 
Prabhakaran's November 27 speech, in which Ambassador had 
clearly rejected both the objective of Tamil secession and 
the use of violence to achieve it. 
 
¶4.  (C) Ambassador also brought up the current visit of Army 
Commander Sarath Fonseka to Washington.  While Fonseka's U.S. 
interlocutors had reiterated U.S. support for Sri Lanka's 
right to defend itself, Ambassador cautioned that this 
support could not be unconditional.  The U.S. urged the Sri 
Lankan government to put an end to human rights violations by 
the security forces and other groups.  Ambassador also noted 
the need for military restraint and requested that Sri Lanka 
refrain from offensive military actions.  Otherwise, U.S. 
ability to support the GSL with military assistance would be 
jeopardized. 
 
U.S SEEKS MORE DYNAMIC GROWTH IN TRADE 
-------------------------------------- 
 
¶5.  (SBU) Ambassador Bhatia reviewed the role of the U.S. 
Trade Representative in international trade policy.  He noted 
the increasing importance of U.S. economic ties to South Asia 
as measured by rapidly expanding trade volumes with many key 
partners, including India.  The U.S. had a good economic 
relationship with Sri Lanka, he said, but would like to see 
more dynamic growth of trade, "well into the double digits," 
above the modest 3-4% in recent years.  This, he suggested, 
stemmed for a comparatively less attractive trade regime of 
higher tariffs and non-tariff barriers, a possible need for 
renewed economic reform, and failure to take better advantage 
of U.S. GSP programs to promote trade with developing 
countries. 
 
¶6.  (SBU) While the U.S. trade deficit with Sri Lanka was not 
large in absolute terms, Bhatia said, there was still a 
 
COLOMBO 00002013  002 OF 003 
 
 
strong imbalance, as Sri Lankan exports were roughly ten 
times its imports from the U.S.  The U.S. clearly would like 
to see this change over time.  Bhatia emphasized the critical 
role that appropriate macroeconomic policies, affective IPR 
protection, and trade-capacity building measures had to play 
in growing Sri Lanka's economy. 
 
MILLENNIUM CHALLENGE COMPACT 
---------------------------- 
 
¶7.  (SBU) President Rajapaksa asked how it would be possible 
to expedite the conclusion of a Millennium Challenge Compact. 
 The process has taken over two years, he noted, and Sri 
Lanka was anxious to proceed.  Bhatia conceded that the 
process was taking longer than anticipated.  The large number 
of irrigation projects had held up consideration of the whole 
package because of environmental and other concerns. 
 
¶8.  (SBU) Rajapaksa indicated that his government was 
prepared to drop the irrigation measures in favor of other 
less complicated infrastructure projects, such as roads. 
Bhatia concurred that this was a good idea, pointing out that 
getting goods to market on time was a critical element in any 
value chain.  Ambassador Blake suggested developing other 
projects to replace the controversial irrigation proposals. 
Rajapaksa's chief of staff Lalith Weeratunga mentioned the 
second international airport for Sri Lanka as a key 
infrastructure project for developing the "hinterlands," so 
that previously marginal areas could contribute to GDP 
growth.  This should be made attractive to international 
investors.  (Post does not believe, however, that the GSL is 
looking to finance the new airport through MCC.) 
 
SECURITY AND INVESTMENT CLIMATE CONCERNS 
---------------------------------------- 
 
¶9.  (C) Bhatia told President Rajapaksa of two major concerns 
for Sri Lanka's growth prospects.  First, many investors had 
been scared away by the deteriorating security situation in 
the country.  Of 180 American companies that planned to 
accompany Commerce U/S Frank Lavin to India, only three had 
chosen to join a similar event for Sri Lanka despite personal 
letters to all the businesses from Ambassador Blake.  Bhatia 
said the daily headlines of increasing violence were a factor 
in discouraging travel by these companies.  Second, there 
were still concerns about the sanctity of contracts in Sri 
Lanka. 
 
¶10.  (C) On the security situation, Rajapaksa showed 
irritation, commenting that the conflict was not a problem 
for the economy in the Colombo area, but that the Colombo 
dateline on reports of violence in Sri Lanka made it appear 
so.  This, he inferred, exaggerated the security situation, 
which was unhelpful. 
 
¶11.  (SBU) On the contract sanctity issue, Bhatia noted 
strong complaints from a Swedish/American carbon blade 
company, Jacobi Carbons, regarding after-the-fact imposition 
of purchasing restrictions.  This damaged Sri Lanka's 
reputation among foreign investors.  Rajapaksa agreed, noting 
that some recent Sri Lanka Supreme Court decisions in that 
case had not been helpful.  The government would seek to 
correct these through legislation.  He had also spoken to his 
economic ministers about this, he said.  "The question is, 
who is running the country?  We, or the Supreme Court?" 
Rajapaksa said that he hoped the Trade and Investment 
Framework Agreement discussions would provide the right forum 
to discuss these issues thoroughly. 
 
COOPERATION ON DOHA AGENDA 
-------------------------- 
 
¶12. (SBU) Bhatia closed by thanking the President for his 
country's strong support for the Doha agenda and asked for 
 
COLOMBO 00002013  003 OF 003 
 
 
continued cooperation, particularly in the area of 
agriculture.  Bhatia urged that Sri Lanka play a constructive 
role in the G-33 group of countries.  The Sri Lanka 
delegation to the WTO worked closely with its U.S. 
counterparts on non-agricultural market access and services, 
he noted. 
 
The USTR delegation cleared this message. 
BLAKE