VZCZCXRO5316
RR RUEHLMC
DE RUEHLM #1399/01 2830914
ZNR UUUUU ZZH
R 100914Z OCT 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6954
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1446
RUEHKA/AMEMBASSY DHAKA 0454
RUEHIL/AMEMBASSY ISLAMABAD 7441
RUEHKT/AMEMBASSY KATHMANDU 5584
RUEHCG/AMCONSUL CHENNAI 8038
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 001399 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR SCA/INS AND EEB/IFD/ODF 
STATE PASS USTR FOR ADINA ADLER 
COMMERCE FOR JONATHAN STONE 
MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE 
TREASURY FOR LESLIE HULL 
 
E.O 12958: N/A 
TAGS: ECON EINV EAID KMCA KCOR CE
SUBJECT:  SRI LANKA: LAGGING IN WORLD BANK EASE OF DOING BUSINESS 
AND TRANSPARENCY INT'L CORRUPTION RANKINGS 
 
 
¶1. Summary:  Sri Lanka rated poorly in the World Bank Group's 
just-released Doing Business 2008 index and in the middle of 
Transparency International's 2007 Corruption Perception Index.  In 
the Ease of Doing Business index, Sri Lanka ranked 101 out of 178 
economies.  Notable was its ranking of 133 in enforcement of 
contracts -- a frequent problem experienced by U.S. firms here.  In 
the Corruption Perception Index, Sri Lanka ranked 94 out of 180 
countries.  In both indexes, Sri Lanka's ranking compared to other 
countries declined from the previous year.  The low rankings 
demonstrated serious impediments in Sri Lanka's domestic and foreign 
investment climate, and the slide from previous years suggested that 
Sri Lanka is not doing enough to compete globally.  With all 
countries in South Asia except for India dropping in the World Bank 
rankings and all except for Pakistan dropping in the Transparency 
International rankings, the report also indicates that the South 
Asia region as a whole is lagging as countries in other regions 
improve their business environments and take on corruption. 
Ambassador continues to raise both the contract enforcement and 
corruption problems with the government and in public statements. 
End Summary. 
 
----------------------- --------------------------- 
(UN)EASE OF DOING BUSINESS IN SRI LANKA, SOUTH ASIA 
----------------------- --------------------------- 
 
¶2. In the World Bank group's "Doing Business 2008" report comparing 
the ease of doing business domestically in 178 countries, Sri Lanka 
ranked 101, down from 89 in the 2007 and 2006 rankings.  India rose 
14 places to 120 from 134 last year.  Aside from India, all other 
South Asian countries' 2008 rankings declined from the previous 
year.  South Asian country rankings in the overall ease of Doing 
Business Index for 2005-2007 are given below.  (Note:  The World 
Bank report states that the 2008 and 2007 overall rankings are not 
directly comparable due to changes in methodology and inclusion of 
three new countries in the index.) 
 
----------------------------------------- 
World Bank Doing Business Index 2006-2008 
        (South Asian Countries) 
----------------------------------------- 
               2008     2007     2006 
----------------------------------------- 
Maldives         60       53       49 
Pakistan         76       74       66 
Sri Lanka       101       89       89 
Bangladesh      107       88       81 
Nepal           111      100       90 
India           120      134      138 
----------------------------------------- 
 
¶3. The Doing Business Index measures and compares ten indicators of 
domestic business regulations and their effects on businesses, 
especially small and medium size domestic firms.  Sri Lanka ranked 
in the top third of countries on three indicators, in the middle 
third on three indicators, and in the bottom third on four 
indicators.  The table below provides Sri Lanka's rankings (out of 
178 economies) by topic: 
 
----------------------------------------- 
World Bank Doing Business Index 2006-2008 
     (Sri Lanka's Rankings by Topic) 
----------------------------------------- 
TOPIC              2008    2007 
----------------------------------------- 
OVERALL DOING BUSINESS       101     89 
 
Starting a business           29     47 
Closing a business            39     31 
Trading across borders        60     94 
Protecting investors          64     62 
Getting credit                97     80 
Employing workers            111    112 
Enforcing contracts          133    133 
Registering property         134    131 
Paying taxes                 158    157 
Dealing with licenses        160    156 
 
COLOMBO 00001399  002 OF 003 
 
 
----------------------------------------- 
 
¶4. Sri Lanka ranked 158th in taxation, the worst in South Asia. 
Companies had to pay on average 64% of profit as taxes.  The tax 
rate for South Asia averaged 41%.  Sri Lanka's tax rate is also 
higher than the OECD average of 46.2%.  Besides high taxation, 
companies need to make 62 different payments in order to pay taxes. 
(Note: The report surveyed tax liability of 100% domestically-owned 
companies.  Most foreign investors are eligible for tax holidays -- 
of 3-7 years for export-oriented companies, and up to 15 years for 
infrastructure investors -- followed by concessionary rates 
thereafter.) 
 
¶5. Sri Lanka's cumbersome legal system was reflected in low rankings 
in the indices covering enforcing contracts, closing a business and 
property registration.  In enforcing contracts, Sri Lanka's rank was 
¶133.  According to the survey, it takes more than 3.5 years and 40 
procedures to enforce a commercial contract.  Further, it took 1.7 
years to close a business, and creditors recovered 45 cents on the 
dollar from insolvent firms.  It took 83 days and 8 procedures to 
register a property.  The cost involved was 5.1% of the property 
value. 
 
¶6. While Sri Lanka is one of the easiest places in the world to hire 
a worker, it is also one of the costliest and most difficult places 
to lay one off.  The firing cost in Sri Lanka is about 168 weeks of 
wages compared with 59.2 weeks in South Asia and 25.7 in OECD.  Sri 
Lanka also ranked low in getting credit, reflecting weaknesses in 
credit information systems and laws. 
 
¶7. Sri Lanka made substantial progress in regulations and procedures 
related to starting a business and trading across borders.  In the 
former it rose eighteen places to 29, and in the latter thirty-four 
places to 60.  The introduction of a new Companies Act and 
electronic filing of customs declarations helped to improve these 
rankings.  The Companies Act eliminated burdensome approvals, 
introduced a flat registration fee, and made company seals and 
notaries optional cutting down start up procedures and the time. 
The electronic customs declarations reduced the time for trading by 
seven days. 
 
------------------------- ------------------------------ 
SRI LANKA, REGION, COMPARATIVELY WORSE IN CORRUPTION TOO 
------------------------- ------------------------------ 
 
¶8. Sri Lanka also did poorly in Transparency International's latest 
Corruption Perception Index, published in September 2007.  Sri Lanka 
slipped 10 places to 94 out of 180 countries in the 2007 CPI.  The 
CPI measures perceptions of public sector corruption.  Sri Lanka 
scored 3.2 out of a possible 10 (10 indicating low levels of 
corruption).  The 2007 score was a marginal improvement from 3.1 in 
¶2006. 
 
¶9. Pakistan was the only South Asian country whose international 
ranking rose in the Transparency International survey; the others 
all fell.  This was despite improved or unchanged perception scores 
for most, again indicating that the rest of the world is improving 
on corruption perceptions more quickly than are the South Asian 
countries. 
 
--------------------------------------- 
AMBASSADOR RAISES CONTRACTS, CORRUPTION 
--------------------------------------- 
 
¶10. Comment: These rankings track with what post has found in 
practice.  Much of our advocacy on behalf of U.S. firms involves 
helping them with problems related to contract enforcement.  The 
Ambassador regularly cites, privately to government officials and 
publicly, contract enforcement as a major obstacle to greater 
foreign investment in Sri Lanka.  For example, speaking to the 
American Chamber of Commerce in Colombo on October 9, the Ambassador 
noted Sri Lanka's rankings on enforcement of contracts and starting 
a  business and stated, "I personally have spent a great deal of 
time and effort attempting to help U.S. companies here resolve 
contract enforcement problems... I know that Minister Amunagama and 
the Board of Investment are eager to work with companies who are 
 
COLOMBO 00001399  003.2 OF 003 
 
 
interested in investing in Sri Lanka, and I urge them to make the 
same kind of progress in contract enforcement as they have in 
business start-up rules." 
 
¶11. Similarly, through USAID's Anti-Corruption Program and the 
Ambassador's private and public statements, the Embassy has drawn 
attention to corruption problems in Sri Lanka.  The Ambassador told 
the October 9 AmCham audience, " Let me mention one other major 
hindrance to trade and investment: corruption.  Corruption damages 
economic development and reform, impedes the ability of developing 
countries to attract foreign investment, hinders the growth of 
democratic institutions, and concentrates power in the hands of a 
few.  A recent Sri Lankan study demonstrated that Sri Lanka's GDP 
would have grown by at least two percentage points in 2006 had 
government corruption been prevented.  The best way to combat 
corruption is for a government, any government, to be open and 
transparent." 
BLAKE