VZCZCXRO4585
OO RUEHBI RUEHLMC
DE RUEHLM #1093/01 2201144
ZNR UUUUU ZZH
O 081144Z AUG 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6580
INFO RUEHKA/AMEMBASSY DHAKA 0334
RUEHIL/AMEMBASSY ISLAMABAD 7317
RUEHKT/AMEMBASSY KATHMANDU 5430
RUEHLO/AMEMBASSY LONDON 3953
RUEHNE/AMEMBASSY NEW DELHI 1250
RUEHNY/AMEMBASSY OSLO 4021
RUEHKO/AMEMBASSY TOKYO 3107
RUEHKP/AMCONSUL KARACHI 2227
RUEHCG/AMCONSUL CHENNAI 7909
RUEHBI/AMCONSUL MUMBAI 5558
RUEHBS/USEU BRUSSELS
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEFDIA/DIA WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHHMUNA/HQ USPACOM HONOLULU HI
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 05 COLOMBO 001093 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR SCA/INS AND EEB/IFD/ODF 
MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE 
TREASURY FOR LESLIE HULL 
 
E.O 12958: N/A 
TAGS: EAID ECON EINV PTER CE
 
SUBJECT: SRI LANKA: EAST DEVELOPMENT -- TRINCOMALEE NOT READY TO 
REALIZE POTENTIAL 
 
REF: A) COLOMBO 971  B) COLOMBO 1057  C) COLOMBO 882  D) COLOMBO 
1003 
 
¶1. (SBU) SUMMARY: Trincomalee, the eastern seaboard town boasting 
one of Asia's finest natural harbors, is underdeveloped and 
depressed as a result of over two decades of civil war in Sri Lanka. 
 The government wants to translate its recent reassertion of control 
over the east into development, much of it based around 
Trincomalee's great economic potential.  It has designated a 
Trincomalee Special Economic Zone into which it hopes to attract 
foreign investors.  But the government's overly centralized approach 
to development and the still unsettled security situation make it 
likely that Trincomalee will continue to languish for many years. 
End summary. 
 
TRINCOMALEE: AWESOME NATURAL HARBOR, DEPRESSED TOWN 
--------------------------------------------- ------ 
 
¶2. (SBU) Trincomalee, on Sri Lanka's east coast, has been renowned 
for centuries for its large, deep, and protected natural harbor.  If 
Sri Lanka had not been at war for the last quarter century, 
Trincomalee now surely would be a major import and export hub. 
Instead, it is depressed, dilapidated, and barely developed.  A 2001 
census estimated the town's population at 26,000, down from 44,000 
in 1981.  Rice farming remains the major occupation for the 
district's 395,000 residents.  The Government of Sri Lanka, having 
recently re-established control over the country's east (ref A), 
believes it is now possible finally to tap Trincomalee's potential. 
 
 
¶3. (SBU) In October 2006, the Board of Investment established a 
Special Economic Zone on 679 square kilometers spreading out from 
the harbor.  The Board hopes to attract foreign investors to 
establish a mix of light and heavy manufacturing, a power plant, 
agriculture, and tourism attractions like whale watching and water 
sports.  The harbor makes Trincomalee's raw potential obvious, but 
the possibility that the ethnic separatist Liberation Tigers of 
Tamil Eelam (LTTE) could again emerge in the vicinity as a threat to 
economic activity may keep investors on the sidelines until the area 
proves truly peaceful.  Econoffs and USAID staff visited Trincomalee 
July 31-August 2 to assess the economic environment in light of the 
government's impending release of a plan for how it envisions 
developing the Eastern Province (ref B). 
 
SOLDIERS AND POLICE EVERYWHERE 
------------------------------ 
 
¶4. (SBU) Trincomalee has been a hotspot in Sri Lanka's long war 
against the LTTE and related civilian violence.  In April 2006 
Singhalese rioters burned shops and homes belonging to Tamils 
following a bomb explosion in a local market and claymore mine 
attacks on soldiers in Trincomalee.  Twenty civilians died in the 
violence and an estimated 1,000 Tamils fled their homes.  There have 
been smaller episodes since then, and the town and district are 
under virtual lockdown.  The military and police maintain a series 
of checkpoints on the main road into town; all vehicles are stopped 
at these.  Bus passengers get out and walk through a physical search 
aisle, getting back on their buses 50 meters down the road.  Trucks 
are checked carefully for explosives.  Backlogs at the checkpoints 
can cause waits of 30 minutes or more.  In town, fully helmeted and 
body-armored soldiers, police, and home guards carrying automatic 
weapons are everywhere.  Many keep their faces covered with black 
bandanas.  Pedestrians are unable to walk more than 100 meters 
without being checked for identification and questioned.  Security 
forces routinely walk into shops along their patrol routes.  Sri 
Lanka's largest navy base, a major air force training base, and an 
army division are all located in Trincomalee. 
 
COLOMBO 00001093  002 OF 005 
 
 
 
SMALL AND MEDIUM ENTERPRISES: STRUGGLING AND ALIENATED 
--------------------------------------------- --------- 
 
¶5. (SBU) The Chamber of Commerce and Industry of Trincomalee, formed 
in 2002, is housed in a non-airconditioned office whose only 
automation is a handful of computers donated by USAID.  The 
Chamber's 164 members are small and medium size enterprises in such 
fields as construction, rice milling, small hotels and retail sales. 
 Chamber board members told us that, aside from rice production, 
business is poor.  There is little commerce aside from trade in food 
and daily essentials in produce markets and small shops.  Many 
residents depend on remittances from relatives working abroad. 
Entrepreneurs have little access to financing, as banks are 
reluctant to lend money for investments that could fail if the 
security situation declines again.  For example, building 
contractors seeking to bid on projects financed by the World Bank 
and the Asian Development Bank have found some banks unwilling to 
issue bid bonds and performance bonds unless the contractors could 
post 100% deposits on the value of the bonds. 
 
¶6. (SBU) Chamber members gave a pessimistic assessment of the 
government's plans to revitalize Trincomalee with a Special Economic 
Zone.  The government did not consult local businesses before 
establishing the zone.  Residents are worried that they will be 
forced to move to make way for outside investors.  They would be 
willing to move if they could be trained to work in the new 
enterprises, but the lack of consultation makes them doubt whether 
they will see real benefits from the changes.  Some Chamber members 
also suspect that Tamils and Muslims in particular would be 
dislocated and unable to benefit from development.  They noted that 
many Tamils and Muslims had left the area because they felt insecure 
and said that the Karuna paramilitary group had moved into some 
unoccupied homes belonging to these people. 
 
THREE BIG MANUFACTURERS: INSULATED FROM STRIFE, 
READY TO EXPAND 
--------------------------------------------- -- 
 
¶7. (SBU) In contrast to the Chamber members' concerns, managers of 
three large foreign-owned industrial operations in Trincomalee 
described a secure and profitable business environment.  The three 
facilities lie nearby one another in the China Bay section of 
Trincomalee harbor, where each has its own jetties in 9 to 15 
meter-deep water, capable of berthing all but the very largest cargo 
ships in use today.  These operations find the harbor highly 
conducive to import of raw materials that they then process on-site 
and conveniently load onto rail, truck, or back onto ships for 
transport elsewhere in Sri Lanka or abroad.  Each dominates its 
market in Sri Lanka and plans to expand operations.  These companies 
have head offices in Colombo and have no difficulty consulting with 
government officials as needed. 
 
- Lanka Indian Oil Company was formed in 2003 when Indian Oil 
Company (IOC) bought a third of the fuel storage and retail sales 
outlets of state-owned Ceylon Petroleum Corporation.  The deal gave 
Lanka IOC ownership of a network of 150 filling stations around the 
country and possession,on a 35 year lease, of an oil tank farm in 
Trincomalee built by the British during World War II.  Lanka IOC 
will soon complete an expansion enabling it to mix lubricant oils 
onsite for sale in Sri Lanka and for export.  Lanka IOC is also 
interested in building an oil refinery.  Security guards account for 
a third of the company's 150 staff in Trincomalee. 
 
- Tokyo Cement, a Japanese-Sri Lankan joint venture that is 45% 
publicly owned, has the largest market share -- 30% -- of the five 
cement brands in Sri Lanka.  It produces 2.4 million tons of cement 
 
COLOMBO 00001093  003 OF 005 
 
 
per year, and is currently expanding to double the output of its 
Trincomalee plant.  The total investment amounts to $100 million in 
plants in Colombo and Trincomalee, including a new 10-megawatt 
biomass power plant that will power the Trincomalee facility and 
yield excess power for sale to the national grid.  The plant employs 
¶135. 
 
- Singaporean flour company Prima operates one of the largest flour 
mills in the world, producing 2,600  metric tons of wheat flour per 
day, some of which it exports.   Prima is the only wheat flour 
producer in Sri Lanka, but has some competition from imported flour. 
 It currently imports 95% of its wheat from Canada and about 5% from 
the United States.  Prima employs 400 permanent and 250 part-time 
employees. It has applied to the Board of Investment to expand its 
operation to include food processing facilities and a warehouse next 
to its flour mill. 
 
CENTRAL GOVERNMENT'S AGENT: ENFORCING SECURITY 
--------------------------------------------- 
 
¶8. (SBU) Retired Army Major General T T R De Silva is the District 
Secretary in Trincomalee, appointed by President Rajapaksa in June 
 
SIPDIS 
2006 and responsible for all aspects of civilian administration.  He 
is the first retired military officer to serve in the normally 
civilian role, which comes under the Ministry of Public 
Administration and Home Affairs and which many still refer to by its 
former designation, "Government Agent." De Silva, who previously 
held commands over military forces in the East and Colombo, has 
drawn criticism from civil society organizations both foreign and 
domestic for his military approach to governance.  With us he 
appeared concerned almost exclusively with ensuring security in 
Trincomalee.  When asked about talk that the government would erect 
a fence along the ring road it was building around Trincomalee, he 
confirmed the plan (but did not want it widely known), analogizing 
the beaten LTTE to embers that could ignite again if exposed to a 
breeze.  The fence would help prevent this, he explained, by making 
it easier for security forces to patrol Trincomalee's perimeter and 
to seal and search the town if necessary. 
 
¶9. (SBU) De Silva shared the Board of Investment's vision of 
Trincomalee hosting a range of economic activities including 
industry, agriculture, fishing and canning, handicraft production, 
and tourism.  He seemed intent on convincing India that Sampur, on 
Trincomalee's remote southern peninsula, was the best location for a 
proposed 500-megawatt coal-fired power plant joint venture that the 
two governments have been discussing for the past few years.  De 
Silva clearly liked the idea of replacing the formerly LTTE-infested 
Sampur jungle with a major Indian installation whose security would 
help ensure that the LTTE stayed out. (Note: Indian High Commission 
Econ chief recently told Econoff that, as reported in the press, 
India is in no rush to proceed with the power plant and is waiting 
for the government of Sri Lanka to propose other possible 
Trincomalee sites besides Sampur.) 
 
¶10. (SBU) De Silva told Emboffs that, despite parts of Trincomalee 
being designated as High Security Zones (ref C), and much of the 
area now categorized as a Special Economic Zone, no residents would 
be displaced against their will.  He believed consultation with 
local business people had been adequate: "They can tell the Board of 
Investment what they want."  He downplayed reports that the Karuna 
group routinely moved around Trincomalee at night armed and 
unchallenged by police or the army, saying they were used to being 
armed and would feel insecure without their weapons.  Instead, he 
asserted "we don't let them carry guns at night." 
 
PROVINCIAL OFFICIALS: IN TOUCH, BUT OUT OF MONEY 
--------------------------------------------- -- 
 
COLOMBO 00001093  004 OF 005 
 
 
 
¶11. (SBU) Provincial level officials from the Ministry of 
Agriculture are working hard to help local farmers improve their 
productivity, according to the Ministry Secretary for the Eastern 
Province.  They state that 65% of area residents are dependent on 
agriculture, but that the sector was badly hurt by the protracted 
fighting, which caused fields to go untended, livestock to scatter 
into the wild, and irrigation facilities to fall into disrepair. 
Addressing these needs was one priority for the ministry; another 
was attracting large investment into rice and maize production in 
order to significantly increase output.  However, the ministry 
allots its provincial officials very little money and insufficient 
staff for these needs.  International NGOs provide more funds than 
does the central government, but for very specific activities. 
 
¶12. (SBU) The Board of Investment and the Sri Lanka Ports Authority 
also have offices in Trincomalee; both are caretaker operations with 
all policy and most operational matters handled in Colombo.  The 
Board of Investment had six people, but five have returned to 
Colombo.  The remaining official, S. Satkunalinkam, told us that 
Phase I of the planned industrial zone had been demarcated on land 
formerly belonging to the Sri Lanka Port Authority.  Contrary to the 
Government Agent's assurance, he said that about 5,200 families 
would have to be moved out of the 1635-acre zone.  He thought they 
would not object though, as they would be given new homes and would 
have the opportunity to find jobs (Note: Colombo officials told us 
they expect the zone to produce 30,000 jobs).  Satkunalinkam said he 
knew the Trincomalee Chamber of Commerce people, but gave no sign 
that he consulted with them regularly. 
 
¶13. (SBU) The Ports Authority runs a small port operation that loads 
and unloads roughly one ship a month -- usually an inbound shipment 
of coal for a cement factory on Sri Lanka's west coast and an 
outbound shipment of mineral sand bound for Russia, plus occasional 
military vessels bound for Jaffna with relief supplies.  The port 
owns three tugboats that help dock the cargo ships coming and going 
from the Lanka IOC, Tokyo Cement, and Prima jetties.  For this the 
port has 668 unionized civil servant employees -- far more than 
needed, but their positions cannot be eliminated. 
 
COMMENT: GOVERNMENT'S TOP DOWN APPROACH WILL 
ADVANCE POLITICAL OVER ECONOMIC GOALS 
------------------------------------------- 
 
¶14. (SBU) Trincomalee's near-term future is dependent on two 
interlinked variables: the central government and the security 
situation.  Neither gives much cause for optimism.  The central 
government is not an effective planner and manages to mire most of 
its initiatives in bureaucracy.  For example, Prima's expansion 
plans, though quickly approved by the Board of Investment, have been 
tied up for months with the Central Environmental Authority. 
Provincial officials are more in touch with local needs than are 
central bureaucrats and politicians, but with Sri Lanka allocating 
only fifteen percent of the national budget to provincial and 
district level government operations, the provincial officials lack 
sufficient resources to make a difference. 
 
¶15. (SBU) As for the security situation, the LTTE will likely remain 
a destabilizing force.  Following its retreat from the east, it 
stated that it would attack military, government, and economic 
targets.  Shortly after, it appears to have assassinated the Chief 
Secretary of the Eastern Provincial Council (ref D).  In this light, 
 
SIPDIS 
the government's preoccupation with security in Trincomalee is 
understandable.  However it is not confidence-inspiring; nor will a 
fence around the town send a positive signal to international 
investors or even to skilled Sri Lankans whom new enterprises will 
need to recruit from elsewhere in the country.  For these reasons, 
 
COLOMBO 00001093  005 OF 005 
 
 
Trincomalee still appears many years away from reaching its economic 
potential. 
MOORE