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RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 23 COLOMBO 000067 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA, EEB/CBA, AND SCA/INS 
 
STATE PLEASE PASS USTR 
 
E.O 12958: N/A 
TAGS: KTDB OPIC ECON USTR EINV EFIN ETRD ELAB PGOV CE
SUBJECT: INVESTMENT CLIMATE STATEMENT 2009 - SRI LANKA 
 
REF: 08 STATE 123907 
 
¶1.  Per reftel, post is pleased to present the investment climate 
statement for Sri Lanka for 2009. 
 
[Begin text:] 
 
INVESTMENT CLIMATE STATEMENT-SRI LANKA 
JANUARY 2009 
 
Openness to Foreign Investment 
 
Unpredictability Impedes Investment 
 
Sri Lanka's intractable civil war, erratic policy environment, and 
cumbersome bureaucracy make it an unpredictable investment 
destination.  However, compared to other South Asian countries, Sri 
Lanka is relatively open to foreign investment.  It offers a 
relatively open financial system, moderately good infrastructure, 
and generally capable workers.  Some U.S. and other foreign 
investors have realized worthwhile returns on investment in Sri 
Lanka; others have tried and gone away frustrated. 
 
Sri Lanka is a lower-middle income developing nation with a gross 
domestic product of about $38 billion in 2008.  This translates into 
a per capita income of over $1,800. 
 
The Sri Lankan economy is remarkable for its resilience.  Although 
suffering a civil war that began in 1983, GDP growth averaged around 
5% in the last ten years.  Even the December 2004 Indian Ocean 
tsunami failed to dent GDP growth, which was over 6% in 2005-2008, 
due in part to damage being offset by reconstruction. Unfortunately, 
inflation remained high during this period, as in 2008, when it 
averaged 14% year-on-year. 
 
Despite the civil war and global recession, Sri Lanka's gross 
domestic product (GDP) grew once again by an estimated 6% in 2008. 
Growth was led by telecommunications, ports, construction, 
government services, agriculture and manufacturing exports.  Sri 
Lanka's trade and current account deficits widened sharply, mainly 
due to higher oil prices.  While Sri Lanka's exposure to the global 
financial crisis is liited due to controls on its capital account, 
SriLanka experienced capital flight by foreign investrs who had 
invested in government debt instrumens.  By early December 2008, 
Central Bank reserves declined to around $2 billion, or less than 2 
months of imports, due to intervention in an attempt to maintain a 
de facto peg against the dollar.  The rupee was allowed to 
depreciate marginally in late December.  As a result, the rupee 
depreciated overall by only about 4% in 2008 and the real effective 
exchange rate of the rupee remains overvalued.  The Central Bank 
expects a balance of payments (BOP) deficit in 2008. 
 
2009 will be a challenging year for the Sri Lankan economy.  The 
Central Bank expects the economy to grow by 5-6% in 2009, aided by 
growth in agriculture, manufacturing and services, and forecasts 
inflation to slow down to single digit levels.  A successful halt to 
the civil conflict, although not yet assured, could also help 
growth.  Nonetheless, the global economic downturn is likely to 
impact the economy in a number of ways.  Exports, services and 
remittances will likely decline, exerting pressure on the currency 
and reserves.  The government's budget forecasts, including a 
deficit of only 6.5% of GDP, are likely unrealistic in light of 
global recessionary conditions.  Sri Lanka will also likely face 
extreme difficulty in obtaining commercial loans in 2009 to assist 
in the financing of its deficit and debt service.  With a continued 
refusal to even consider IMF assistance in the future, it will need 
to either significantly revise its forecasts for 2009, or find other 
sources of funds. 
 
Sri Lanka is a stable parliamentary democracy.  In 1978, it shifted 
away from a socialist orientation and opened to foreign investment. 
However, changes in government have often been accompanied by 
reversals in economic policy.  Of the two major parties, the more 
pro-business United National Party has been in opposition in recent 
years.  When it last held power, from 2002 to 2004, it pursued 
privatization and regulatory reform welcomed by domestic and foreign 
investors. 
 
COLOMBO 00000067  002 OF 023 
 
 
 
Currently, the ruling Sri Lanka Freedom Party has a more statist 
economic approach, guided by President Rajapaksa's 2005 election 
manifesto Mahinda Chintana ("Mahinda's Thoughts").  Mahinda Chintana 
seeks to reduce poverty by steering investment to disadvantaged 
areas; developing small and medium enterprises; promoting 
agriculture; and expanding the already enormous civil service.  The 
Rajapaksa government has halted most privatization  and advocates 
permanent state control of what it deems "strategic" enterprises 
such as state-owned banks, airports, and electrical utilities.  The 
government has increased direct and indirect taxation to fund 
increased government expenditure.  The government has adopted import 
substitution and has increased taxes on imports to protect local 
industries. 
 
Multinational companies complain that increasing government bias in 
favor of local businesses is harming the local investment climate. 
Though many multinational companies perform better than the local 
private sector, international MNCs and SMEs feel the government is 
blatantly biased towards local companies.  Some investors believe, 
and are concerned, that Sri Lanka is becoming a highly nationalistic 
environment where the government often blames foreigners for its 
economic and social ills. 
 
The 24-year ethnic conflict between the U.S.-designated terrorist 
organization Liberation Tigers of Tamil Eelam (LTTE) and the 
Government of Sri Lanka has been a serious impediment to foreign 
investment.  A Norwegian-brokered ceasefire between the LTTE and the 
government, in effect since February 23, 2002, broke down in 2006 
and was formally abrogated by the government in January 2008.  As a 
result of major military operations, the government recently 
regained control of the Eastern Province (2007) and most of the 
Northern Province (2008).  The government's military offensive to 
regain the control of the entire national territory appears to be on 
the verge of success. 
 
Other impediments to investment in Sri Lanka are workers' declining 
English language skills, inflexible labor laws, overburdened 
infrastructure, and its unreliable court system.  Sri Lanka boasts a 
90% literacy rate in the local Sinhala and Tamil languages, but 
English, which was once widely spoken, is now far less prevalent. 
Sri Lanka's labor laws include many model protections, but can make 
it nearly impossible for companies to lay off workers even when 
market conditions fully warrant doing so.  The cost of dismissing an 
employee in Sri Lanka is, percentage-wise, one of the highest in the 
world.  Sri Lanka has not invested in infrastructure to keep pace 
with its growth.  Its roads are narrow and congested.  Its 
electricity supply is generally reliable but can fail to meet peak 
demand in years of low rainfall and is priced higher than in other 
Asian countries.   Businesses in Sri Lanka also face high interest 
rates.  Sri Lanka's courts cannot be relied upon to uphold the 
sanctity of contracts.  The courts are not practical for resolving 
disputes or obtaining remediation, because their procedures make it 
possible for one side in a dispute to prolong cases indefinitely. 
Aggrieved investors (especially those dealing with the government of 
Sri Lanka on projects) have frequently pursued out-of-court 
settlements, in hopes of speedier resolution.  In late 2008, the 
Supreme Court, in an interim order, halted payments to five 
international and local banks involved in oil hedge contracts with 
the government.  One of the involved banks is American. 
 
Trade 
 
According to preliminary data for 2008, Sri Lanka's exports (mainly 
apparel, tea, rubber, gems and jewelry) were $8.2 billion and 
imports (mainly oil, textiles, food, and machinery) were $14.1 
billion.  Exports to the United States, Sri Lanka's second largest 
market, are projected around $1.9 billion in 2008, or 24% of total 
exports.  For many years, the United States has been Sri Lanka's 
biggest market for garments, taking about 50% of total garment 
exports.  India is Sri Lanka's largest supplier, with exports of 
over $2.6 billion.  The United States' exports to Sri Lanka are 
projected at around $280 million in 2008.  US exports consist 
primarily of wheat as well as industrial machinery, medical 
instruments, paper, specialized fabrics and textiles for use in the 
garment industry, and pharmaceuticals. 
 
 
COLOMBO 00000067  003 OF 023 
 
 
Board of Investment 
 
The Board of Investment (BOI) (www.boi.lk), an autonomous statutory 
agency, is the primary government authority responsible for 
investment, with a focus on foreign investment.  The BOI is 
authorized to manage a number of export processing zones which 
feature business-friendly regulations and improved infrastructure 
for foreign investors.  The BOI is intended to provide "one-stop" 
service for foreign investors, with duties including approving 
projects, granting incentives, and arranging services such as water, 
power, waste treatment and telecommunications.  It also assists in 
obtaining resident visas for expatriate personnel and facilitates 
import and export clearances.  The Public-Private Partnership Unit, 
a new division of BOI, has responsibility for coordinating all 
public-private infrastructure projects. 
 
BOI incentives are attractive and real, but the BOI is not the "one 
stop shop" it aspires to be.  Although it is relatively effective in 
assisting investors who want to establish operations within its 
industrial processing zones, it is less effective in facilitating 
and service large investments outside these zones.  Sri Lanka's 
large, inefficient, and dated bureaucracy often works at 
cross-purposes with BOI authorities and commitments.  Additionally, 
major investments in Sri Lanka, such as infrastructure projects, 
require approval from the full cabinet, a process which is not 
transparent and which can politicize even the most needed 
investments.  Registration of foreign company branch offices in Sri 
Lanka can be cumbersome as well. 
 
Although there are cases in which it appears that the BOI has been 
used for political purposes upon occasion, generally the treatment 
given to foreign investors is non-discriminatory.  However, even 
with incentives and BOI facilitation, foreign investors face 
difficulties operating in Sri Lanka.  Problems range from difficulty 
clearing equipment and supplies through customs speedily to 
difficulty obtaining a factory site.  Legal challenges to 
environmentally sensitive projects have been burdensome, even when 
objections are unfounded.  Slow and indecisive application of 
bureaucratic requirements has also obstructed investment.  In part 
to avoid these delays, and to overcome land allocation problems, the 
BOI encourages investors to locate their operations in 
BOI-established industrial processing zones.  Investors locating in 
industrial zones also get access to relatively better infrastructure 
facilities such as reliable power, telecommunication and water 
supplies. 
 
Laws Affecting Investment 
 
The principal law governing foreign investment is Law No. 4, created 
in 1978 (known as the BOI Act), as amended in 1980, 1983 and 1992, 
along with implementation 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 on minimum investment, exports and in some cases 
employment.  Investment approval under Section 16 of the act permits 
entry for foreign investment to operate under the "normal" laws of 
the country and applies 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 as amended in 1991 and 2003, and the Takeovers and Mergers Code 
of 1995 revised in 2003.  A new Companies Act came into effect in 
2007 replacing the Companies Act of 1982.  The new law aims to 
improve trade and commerce as well as corporate governance in the 
business sector.  It features simplified regulations concerning 
company formation; provisions specifying the duties of company 
directors; provisions to prevent the abuse of powers by directors; 
provisions to protect creditors; and a dispute board to settle 
disputes among directors.  Various labor laws and regulations also 
affect investors.  See sections below. 
 
Foreign Equity Shares by Sector 
 
The government allows 100% foreign investment in the following 
services:  banking, finance, insurance, stock-brokering, 
construction of residential buildings and roads, supply of water, 
mass transportation, telecommunications and information technology 
 
COLOMBO 00000067  004 OF 023 
 
 
(software development and business process outsourcing), energy 
production and distribution, professional services, and the 
establishment of liaison offices or local branches of foreign 
companies.  These services are regulated and subject to approval by 
various government agencies.  The screening mechanism is 
non-discriminatory and, for the most part, routine. 
 
Investment in other sectors is restricted and subject to screening 
and approval on a case-by-case basis when foreign equity exceeds 
49%.  The affected sectors are:  shipping and travel agencies; 
freight forwarding; fishing; timber-based industries; growing and 
primary processing of tea, rubber, coconut, rice, cocoa, sugar and 
spices; and the production for export of goods subject to 
international quota.  Foreign investment restrictions and government 
regulations also apply to international air transport; coastal 
shipping; lotteries; large-scale mechanized gem mining; and 
sensitive industries such as military hardware, dangerous drugs and 
currency. 
 
Foreign investment is not permitted in the following businesses: 
non-bank money lending; pawn-brokering; 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 $150,000); coastal fishing; and the awarding of local 
university degrees.  Foreign degree courses can be offered in Sri 
Lanka by affiliating with foreign universities.  However, there is 
no scheme to monitor the quality assurance or accreditation of the 
foreign courses offered in Sri Lanka. 
 
Privatization Halted 
 
The current Government has halted most privatization.  Government 
treatment of foreign investors in past privatization processes has 
been largely non-discriminatory.  In 2003, however, the government 
sold part of the retail operations of state-owned Ceylon Petroleum 
Corporation to Indian Oil Corporation without a formal tender 
process.  In 2008, the Supreme Court cancelled a privatization of a 
government owned bunkering company, done in 2002, citing it was 
illegal. 
 
Labor unions in state-owned enterprises are often opposed to 
privatization and restructuring and seem particularly averse to 
foreign ownership.  In the past, this made the privatization of 
government entities problematic for new foreign owners. 
 
Conversion and Transfer Policies 
-------------------------------- 
 
In accordance with its Article VIII obligations as a member of the 
International Monetary Fund 
(http://www.imf.org/external/pubs/ft/aa/aa08. htm), Sri Lanka has 
liberalized exchange controls on current account transactions.  In 
times of balance of payments difficulties the government tends to 
impose controls on foreign exchange transactions.  Most recently, in 
October 2008, the Central Bank required importers to keep a 100% 
deposit on letters of credit on a range of imports.  The deposit 
requirement on the import of cars is 200% of the value of the 
import. 
 
Exporters must repatriate export proceeds within 90 days to settle 
export credit facilities.  Other export proceeds can be retained 
abroad in a local banks correspondent bank.  Currently, contracts 
for forward bookings of foreign exchange are permitted for a maximum 
period of 180 days for the purposes of payments in trade. In 
addition, with effect from November 1, 2008 banks are required to 
obtain a 100% deposit of the contract value in rupees. 
 
There are no barriers, legal or otherwise, to the expeditious 
remittance of corporate profits and dividends for foreign 
enterprises doing business in Sri Lanka.  Remittance of business 
fees (management fees, royalties and licensing fees) is also freely 
permitted for companies with majority foreign investment approved 
under Section 17 of the BOI Act.  Repatriation of funds for debt 
service and capital gains of companies exempted by the BOI from 
exchange control regulations is permitted.  Other foreign companies 
remitting funds for debt service, business fees and capital gains 
 
COLOMBO 00000067  005 OF 023 
 
 
require Central Bank approval. 
 
The average delay period for remitting investment returns such as 
dividends, return of capital, interest and principal on private 
foreign debt, lease payments, royalties and management fees through 
normal, legal channels is in the range of 1 to 4 weeks. All stock 
market investments can be remitted without prior approval of the 
Central Bank through a special bank account.  Investment returns can 
be remitted in any convertible currency at the legal market rate. 
 
While controls on capital account (investment) transactions usually 
prohibit foreigners from investing in Sri Lankan debt instruments, 
the government allows limited access to foreigners to invest in 
government rupee bonds and treasury bills.  The Central Bank's 
dollar denominated bond issues in the local market are also open to 
foreign investors.  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 
------------------------------ 
 
Since economic liberalization policies began in 1978, the Sri Lankan 
Government has not expropriated a foreign investment.  The last 
expropriation dispute was resolved in 1998. 
 
Dispute Settlement 
------------------ 
 
Legal System 
 
Sri Lanka's legal system reflects diverse cultural influences. 
Criminal law is fundamentally British.  Basic civil law is 
Roman-Dutch.  Laws pertaining to marriage, divorce, and inheritance 
are communal.  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.  Its 
amendments have, by and large, kept pace with subsequent legal 
changes in the U.K.  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. 
 
Sri Lanka's court system consists of the Supreme Court, the Court of 
Appeal, Provincial High Courts and the Courts of First Instance viz. 
district courts (with general civil jurisdiction) and magistrate 
courts (with criminal jurisdiction).  The provincial high courts 
have original, appellate and reversionary criminal jurisdiction. 
The Court of Appeal sits as the intermediate appellate court with a 
limited right of appeal to the Supreme Court.  The Supreme Court 
exercises final appellate jurisdiction for all criminal and civil 
cases.  Citizens may apply directly to the Supreme Court for 
protection if they believe any government or administrative action 
has violated their fundamental human rights. 
 
All commercial matters exceeding the value of Rs 3 million 
(approximately $26,500) fall within the jurisdiction of the 
Commercial High Court of Colombo.  There are also a number of 
tribunals which exercise judicial functions, such as the Labor 
Tribunals to hear cases brought by workers against their employers. 
Until recently, the court system was largely free from government 
interference.  There are allegations that the judiciary is sometimes 
subject to political influence, but this has not been evident in 
commercial litigation so far.  Litigation can be slow and 
unproductive, though.  Monetary judgments are usually made in local 
currency.  Procedures exist for enforcing foreign judgments. 
 
In late 2008, acting on a fundamental human rights petition, the 
Supreme Court, in an interim order, halted payments to five 
international and local banks involved in oil hedge contracts with 
the government.  One of the banks involved is American. 
 
Bankruptcy Laws 
 
 
COLOMBO 00000067  006 OF 023 
 
 
The Companies Act and the Insolvency Ordinance provide for 
dissolution of insolvent companies, but there is no mechanism to 
facilitate the re-organization of financially-troubled companies. 
Other laws make it difficult to keep a struggling company solvent. 
The Termination of Employment of Workmen Act (TEA), for example, 
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.  The Labor Commissioner's 
approval or the affected employee's consent is required to fire 
workers.  The government has introduced a standard compensation 
formula under the TEA to facilitate termination for other than 
disciplinary reasons.   Employers protest that compensation is 
excessive compared to similar formulae in the Asian region, with 
terms in Sri Lanka about twice as generous as the East Asian 
average.  (See section on "Labor" for further details.) 
 
In the absence of proper bankruptcy laws, extra-judicial powers 
granted by law to financial institutions protect the rights of 
creditors.  When a company cannot meet the demands of a creditor for 
a sum exceeding Rs 50,000, (approximately $440) the creditor may 
petition for company to be dissolved by the court.  Lenders are also 
able to enforce financial contracts through powers that allow them 
to foreclose on loan collateral without the intervention of courts. 
However, loans below Rs 5 million ($442,500) are exempt from the 
application of the law.  Additionally, a recent judgment ruled that 
these powers would not apply with respect to collateral provided by 
guarantors to a loan.  These two moves have weakened creditors' 
rights.  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 
filed in courts, the judicial process is extremely slow. 
 
The new Companies Act of 2007 introduced a "solvency test" to 
determine the financial health of a company.  There are provisions 
relating to the responsibilities of a company's directors in cases 
of serious loss of capital.  The solvency test is intended to 
prevent companies without sufficient assets from obtaining loans and 
to protect rights of creditors. 
 
The Companies Act does not provide for the revival of struggling 
companies.  However, as in the past, it is expected that the courts 
would take a liberal attitude towards any restructuring plans that 
may be of benefit to a company. 
 
Investment Protection 
 
In principle, foreign investments are 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.  Under Article 
157 of the Constitution of Sri Lanka, investment protection 
agreements enjoy the force of law and no legislative, executive or 
administrative action can be taken to contravene them.  The 
government has ratified the Convention on Settlement of Investment 
Disputes, which provides the mechanism and facilities for 
international arbitration through the World Bank's International 
Center for the Settlement of Investment Disputes (ICSID). 
 
The U.S.-Sri Lanka Bilateral Investment Treaty (BIT) was ratified by 
both governments in 1993 
(www.state.gov/documents/organization/43588.p df). 
 
Arbitration 
 
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) 
(www.iclparbitrationcentre.com) has been established in Colombo for 
the expeditious, economical, and private settlement of commercial 
disputes.  However, the ICLP appears unlikely to become involved in 
disputes involving the Sri Lankan Government, which is often a party 
to disputes involving foreign investors. 
 
 
COLOMBO 00000067  007 OF 023 
 
 
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. 
 
The Labor Department has a process involving labor tribunals for 
settling industrial disputes with workers or unions, and arbitration 
is required when attempts to reconcile industrial disputes fail. 
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. 
 
The government record in handling investment disputes is 
problematic.  Disputes often become politicized, causing the 
government to put political interests ahead of its respect for the 
sanctity of contracts.  For example, in 2006, the Indian Oil 
Corporation's petroleum retailing subsidiary in Sri Lanka 
temporarily closed its operations when the government failed to 
honor its commitment to reimburse the company for fuel sold at the 
government-controlled price. 
 
Investment Disputes Involving U.S. Companies 
 
U.S. companies have experienced problems with payment of valid 
contracts; implementation of agreements with the government; and 
inexplicable failure to secure contracts, despite demonstrated 
superior performance, high value, and competitive bids. 
 
A U.S. power company producing electricity in Colombo has been 
unable to obtain payment since 2004 for power that it produced under 
a temporary, more costly, operating mode following a fire in its 
plant.  The company had intended to suspend operations to conduct 
repairs following the fire, but agreed to the government's request 
that it keep producing power even at a higher cost.  However, the 
government withheld payment on the basis of a questionable Attorney 
General finding that the higher than usual electricity price was 
imposed on the government "under duress." 
 
Performance Requirements and Incentives 
 
Performance Requirements 
 
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% of production, while those 
in the service sector must earn at least 70% of income in foreign 
exchange.  Sri Lanka complies with WTO Trade Related Investment 
Measures (TRIMS) obligations. 
 
Sri Lanka encourages foreign investment in information technology, 
electronics assembly, light engineering, automobile parts and 
accessories manufacturing, industrial and information technology 
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, nor are 
they expected to transfer technology within a specified period of 
time, except for build-own-transfer or other such projects in which 
the terms are specified within pertinent contracts. 
 
In some BOI-approved enterprises, businesses are required to 
maintain certain levels of employment to enjoy incentives.  In 
addition, privatization agreements generally prohibit new owners 
from dismissing 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. 
 
Foreign investors who remit at least $250,000 can qualify for a 
one-year resident visa, which can be renewed.  Employment of foreign 
personnel is permitted when there is a demonstrated shortage of 
qualified local labor.  Technical and managerial personnel are in 
 
COLOMBO 00000067  008 OF 023 
 
 
short supply, and this shortage is likely to continue in the near 
future.  In the past, foreign employees attached to BOI-approved 
companies received preferential tax treatment for an initial period. 
 This concession was withdrawn in April 2008.  BOI is planning to 
appeal to the Finance Ministry to reverse this decision.  Foreign 
employees in the commercial sector do not experience significant 
problems in obtaining work or residence permits. 
 
Investment Incentives 
 
The Board of Investment (www.boi.lk) has various incentives, with 
such investments typically requiring prior approval by various 
ministries.  Please see the note at the end of this section on 
proposed changes to the incentive programs listed: 
 
Incentive Program I: 
 
Qualifying industries: 
-Non-traditional manufacturing exports and companies supplying to 
exporting companies.  Minimum investment of $500,000(a); 
-Export oriented services.  Minimum investment of $500,000; 
-Manufacture of industrial tools and/or machinery.  Minimum 
investment of $500,000; 
-Small-scale infrastructure.  Minimum investment of $500,000; 
-Research and development.  Minimum investment of $100,000; 
-Agriculture and agro processing industries.  Minimum investment of 
$150,000; 
-Export trading houses of rural sector.  Minimum investment of 
$150,000 
 
Incentives:  Currently, the above industries qualify for a five-year 
tax holiday.  A preferential tax of 10% in the 6th and 7th years 
follows the tax holiday for some industries.  Some of 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 
two-year tax holiday is available for investments with an investment 
less than $500,000.  A recently introduced Economic Service Charge 
(ESC) at 0.25% of income applies to BOI-approved companies with tax 
holidays.  The tax applies even to existing companies -- there is no 
grandfather clause. ESC will apply to BOI approved manufacturing 
companies from the fourth year of operation. 
 
Incentive Program II: 
 
Qualifying Industries: 
-Information technology (IT) or information technology enabled 
services.  Minimum investment of $150,000.  Minimum employment 
levels apply; 
-Information technology training institutes.  Minimum number of 
students applies; 
-Business Process Outsourcing (BPO).  Minimum investment of 
$150,000.  Minimum employment levels apply; 
-Regional operating headquarters providing the following services to 
related businesses outside Sri Lanka:  administration, business 
planning, sourcing raw materials, research and Development, 
technical support, financial and treasury management, marketing and 
sales promotion.  Minimum investment of $250,000. 
 
 
Incentives:  Currently, IT services, IT training institutes, and BPO 
firms qualify for tax holidays of 5-12 years provided they meet 
minimum employment and student levels.  Otherwise, a preferential 
tax of 10% applies for 2 years.  Regional operating headquarters 
qualify for a tax holiday of 3 years.  A preferential tax of 10% 
will apply in the 4th and 5th years.  From the 6th year onwards, a 
preferential tax of 15% will apply.  Capital goods for these 
projects will be exempted from import duty for above investments. 
An Economic Service Charge at 0.25% of income applies to 
BOI-approved companies enjoying tax holidays, from the fourth year 
of operation.  The government proposed in late 2008 to charge this 
tax from the year of commencement, with effect from April 1, 2009. 
 
Incentives for Regional Development 
 
COLOMBO 00000067  009 OF 023 
 
 
 
The BOI has a separate incentive program to promote regional 
development, with the aim of establishing new factories or service 
companies (such as hotels, hospitals, or training institutes) in the 
regions outside the capital Colombo.  The incentives include 10-20 
year tax holidays for investments in northern and eastern provinces 
and 2-10 year tax holidays for investments located in other 
provinces.  In addition, imports of machinery and equipment are 
exempted from both customs duty and the value-added tax.  Minimum 
investment levels apply. 
 
Incentives for Eastern Province Development 
 
Investments in the three districts in the Eastern Province, Ampara, 
Batticaloa, and Trincomleee, receive generous tax incentives 
including 10-20 year tax holidays.  Incentives are targeted at 
producers of textile and apparel, food, wood, paper, rubber and 
plastic products, fishing gear and fishing boats.  In addition, 
hotels, agriculture-based industries, and fisheries are also 
entitled for these incentives.  Exporting companies can import raw 
material, capital goods and construction material free of import 
duty under this program.  Companies producing for the local market 
can import capital goods and construction material without duty.  In 
addition, state lands will be made available at concessionary rates 
for these projects. 
 
Incentives for Infrastructure Development 
 
Companies acquiring existing companies in petroleum, power 
generation, transmission, development of highways, seaports, 
airports, railways, 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 8 years 
depending on the magnitude of investment.  A preferential tax of 15% 
will follow after the tax holiday period.  These companies will also 
qualify for duty free imports of capital goods.  A minimum 
investment of $12.5 million is required. 
 
Large-scale new 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 3 to 15 years 
depending on the size of the investment.  A preferential tax of 15% 
will follow the tax holiday.  They will also qualify for duty free 
imports of capital goods.  A minimum investment of $12.5 million is 
required. 
 
Incentives for Other Investments 
 
-Industrial estates.  Minimum investment of $500,000 to $10 million; 
tax holidays ranging from 3 to 15 years; 
-Textile fabric manufacturing, processing.  Minimum investment of 
$500,000 to $10 million; tax holidays ranging from 5 to 15 years. 
 
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.  The BOI has 
introduced an investor matchmaking service via the BOI website. 
Information regarding this service can be found at 
www.boi.lk/partnership. 
 
Trade Agreements Enhance Market Access to South Asia and Europe 
 
A preferential trade agreement, the Indo-Lanka Free Trade Agreement 
(ILFTA) (www.doc.gov.lk) between Sri Lanka and India, is now in 
effect.  Under this agreement, most products manufactured in Sri 
Lanka with at least 35% domestic value addition (if raw materials 
are imported from India, domestic value addition required is only 
25%), qualify for duty free entry to the Indian market.  Tariff 
concessions for Sri Lankan products include zero tariffs on 4,235 
items; 50 to 100% reduction for tea and garments under quota; 25% 
reduction for 553 textile items; and no reduction for 431 items on 
India's "negative list."  Discussions are underway to reduce the 
negative lists of both countries.  The two countries are also 
discussing services sector liberalization, under a proposed 
 
COLOMBO 00000067  010 OF 023 
 
 
Comprehensive Economic Partnership Agreement (CEPA).  Other areas 
potentially covered by the CEPA are investment and economic 
cooperation.  Because production constitutes a portion of value 
addition, ILFTA and the proposed CEPA enables foreign firms 
operating in Sri Lanka to gain preferential entry into the Indian 
market. 
 
Some U.S. companies currently avail themselves of the ILFTA by 
adding at least 35% value in Sri Lanka and getting import duties 
into India reduced from as much as 15% to as little as zero.  The 
American Chamber of Commerce in Sri Lanka, in a study on the ILFTA, 
identified agro processing, food preparation, tea, rubber products, 
coconut products, spices, furniture, ceramic and confectionary as 
having growth potential in India.  The study also found vehicles and 
vehicle parts, aircraft parts and motorcycles to be possible 
attractive sectors for U.S. manufacturers under the Indo-Lanka 
Agreement. 
 
Sri Lanka's Board of Investment promotes the following product 
sectors under ILFTA:  beverages, confectionary, rubber products, 
plastics, coconut products, footwear, paper, textiles and garments, 
artificial plants, ceramics, glassware, jewelry, iron and steel 
products, aluminum extrusions, machinery and mechanical appliances, 
electronics and electrical products, automobiles and spare parts, 
furniture, and doors. 
 
The 2005 Sri Lanka-Pakistan Free Trade Agreement (SLPKFTA) 
(www.doc.gov.lk) provides Sri Lanka with duty-free entry into 
Pakistan for 206 items.  Pakistan's negative list contains 541 items 
with no duty concessions.  Pakistan is expected to offer duty free 
entry to almost all Sri Lankan exports except those in the negative 
list in 2009.  Sri Lanka's Board of Investment promotes the 
following product sectors under SLPKFTA:  spices, coconut based 
products, animal or vegetable oils, confectionary, processed food, 
rubber products, ceramics, jewelry, iron and steel, copper and 
aluminum articles machinery and mechanical appliances, electronics 
and electrical appliances, medical instruments, and automobiles and 
spare parts. 
 
Sri Lanka and six other South Asian nations belonging to the South 
Asian Association for Regional Cooperation (SAARC) agreed in 2004 to 
establish a South Asian Free Trade Area (SAFTA) 
(http://www.saarc-sec.org/main.php), which began operation on July 
1, 2006.  SAFTA offers regionalized tariff reductions for imports 
from member countries.  Stated goals of SAARC members under SAFTA 
are to reduce duties for imports from member countries to between 
zero and 5% over a period of 7-10 years. 
 
These agreements help make Sri Lanka a gateway to South Asia for 
foreign investors. 
 
Sri Lankan exports to the European Union (EU) are also duty free 
under the "GSP-Plus" incentive agreement in effect since July 2005, 
Under this program, 7,200 Sri Lankan products meeting 
rules-of-origin criteria can enter the EU duty free.  The GSP plus 
scheme for Sri Lanka was renewed in January 2009 for a period of 
three years, subject to the results of an on-going investigation. 
Depending on the findings of the investigation, benefits could be 
withdrawn before 2011. 
 
Right to Private Ownership and Establishment 
 
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 to access to markets, credit, or licenses. 
Foreign ownership is allowed in most sectors.  Private land 
ownership is limited to fifty acres per person.  The government owns 
about 80% of the land in Sri Lanka, including the land housing most 
tea, rubber, and coconut plantations.  The government has leased 
most of these plantations to the private sector on 50-year terms. 
Although state land for industrial use is usually 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. 
 
While foreign investors can purchase land from private sellers, the 
government has imposed a 100% tax on land transfers to foreigners. 
 
COLOMBO 00000067  011 OF 023 
 
 
For this purpose, Sri Lanka has defined foreign investment to 
involve as little as 25% foreign ownership - a definition that can 
be particularly difficult for companies listed on the Colombo Stock 
Exchange since on any particular day, their ownership 
characteristics may vary.  Apartments above the third floor of 
condominium buildings, land for the development of large housing 
schemes, hospitals and hotels with a minimum investment of $10 
million, exporting companies with a minimum investment of $1 
million, and large infrastructure projects with a minimum investment 
of $50 million are exempted from the tax.  Regulations regarding 
these exceptions have been published in Gazette No 1386/18 dated 
March 30, 2005. 
 
Protection of Property Rights 
----------------------------- 
 
Property Rights 
 
Secured interests in property are recognized and enforced.  The 
legal system is nondiscriminatory and protects and facilitates 
acquisition and disposition of property rights by foreigners, 
although it has recently become subject to political influence.  A 
fairly reliable registration system exists for recording private 
property including land, buildings and mortgages.  However, there 
are problems due to fraud and forged documents.  The Government has 
begun to address these issues under a World Bank-sponsored judicial 
reforms project. 
 
Intellectual Property Rights Protection 
 
Sri Lanka is a party to major intellectual property agreements 
including the Berne 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 United States in 
1991 signed a Bilateral Agreement for the Protection of Intellectual 
Property Rights.  Sri Lanka, a WTO member, is also a party to the 
Trade Related Intellectual Property Rights (TRIPS) agreement in the 
World Trade Organization.  Sri Lanka has not acceded to the WIPO 
Performances and Phonograms Treaty (WPPT); the WIPO Copyright Treaty 
(WCT); or the WTO Information Technology Agreement. 
 
In November 2003, a new intellectual property law came into force 
that was intended to meet both U.S.-Sri Lanka bilateral IPR 
agreement and TRIPS obligations to a great extent.  The law governs 
copyrights and related rights, industrial designs, patents, 
trademarks and service marks, trade names, layout designs of 
integrated circuits, geographical indications, unfair competition, 
databases, computer programs, and undisclosed information.  All 
trademarks, designs, industrial designs and patents must be 
registered with the Director General of Intellectual Property.  Sri 
Lanka introduced regulations to regulate the commercial use of local 
creations in 2008. 
 
Infringement of intellectual property rights (IPR) is a punishable 
offense under the law.  Intellectual property rights come under both 
criminal and civil jurisdiction.  Recourse available to owners 
includes injunctive relief, seizure and destruction of infringing 
goods and plates or implements used for the making of infringing 
copies, and prohibition of imports and exports.  Penalties for the 
first offence include a prison sentence of 6 months or a fine of up 
to Rs 500,000 ($4,425), but smaller penalties are the norm. 
Penalties can be doubled for a second offense.  Aggrieved parties 
can seek redress for any IPR violations through the courts, though 
this can be a frustrating and time-consuming process. 
 
Since the passage of the 2003 IPR law Sri Lanka has slowly begun 
enforcing its provisions.  The Police occasionally raid counterfeit 
CD/VCD stores as well as counterfeit garment sellers.  However, it 
is rare for the police to act without a formal complaint and 
assistance from an aggrieved party.  Several offenders have been 
charged or convicted by courts.  However, the minimal damages and 
suspended sentences imposed suggest that the court system still 
fails to recognize the significance of intellectual property 
 
COLOMBO 00000067  012 OF 023 
 
 
rights. 
 
Counterfeit goods continue to be widely available in Sri Lanka. 
Local agents of well-known U.S. and other international companies 
representing recording, software, movie, clothing and consumer 
product industries continue to complain that lack of IPR protection 
is damaging their businesses.  Piracy of sound recordings and 
software is widespread, making it difficult for the legitimate 
industries to protect their market and realize their potential in 
Sri Lanka.  Software companies complain of the lack of IPR 
enforcement within government institutions and even some larger 
corporations, including several banks.  An IPR working group of 
adversely affected industries, led by the American Chamber of 
Commerce of Sri Lanka, is working to pursue more aggressive 
enforcement and enhance public awareness. 
 
Patents, Copyrights and Trademarks 
 
Patents are valid for 20 years from the date of application but must 
be renewed annually.  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 essential 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 
a human or animal body.  The law also permits compulsory licensing 
and parallel imports of pharmaceutical products.  Compulsory 
licensing will allow the government to grant licenses to manufacture 
certain patented drugs, overruling patent licenses in a national 
emergency.  The parallel imports will allow the import of a branded 
drug from an alternative source. 
 
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. 
 
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 Regulatory System 
--------------------------------- 
 
The Board of Investment strives to inform potential investors about 
laws and regulations that may affect operations in Sri Lanka.  Laws 
are in place pertaining to tax, labor and labor standards, exchange 
controls, customs, environmental norms, and building and 
construction standards.  However, some of the laws and regulations 
are difficult to access. 
 
Foreign and domestic investors often complain that the regulatory 
system is unpredictable due to outdated regulations, rigid 
administrative procedures, and excessive leeway for bureaucratic 
discretion.  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. 
Lack of sufficient technical capacity within the government to 
review financial proposals for private infrastructure projects also 
creates problems during tendering.  An example of weakness in 
regulations occurred in mid-2006, when police and government 
agencies closed two satellite television broadcasting stations for 
not possessing required licenses.  The two stations remained closed 
for over five months, before various government agencies 
reauthorized their operations. 
 
In 2005-2007, the Government awarded several key infrastructure 
projects to Chinese companies outside the tender process.  They 
included a 300 megawatt coal power project, a fuel bunkering 
project, and a large port construction project in the Southern 
district of Hambantota.  In addition, the Government has promised 
 
COLOMBO 00000067  013 OF 023 
 
 
oil exploration rights to India and China outside the tender 
process.  Similarly, in 2008, the government-owned Ceylon Petroleum 
Corporation signed an agreement with the government of Iran to 
finance the expansion of the country's oil refinery. The government 
had previously signed a Memorandum of Understanding with an American 
company to negotiate an agreement for the same project. 
 
Although many foreign investors, including U.S. firms, have had 
positive experiences in Sri Lanka, some have encountered significant 
problems with government practices and regulations.  Some 
multinational firms have experienced extensive unexplained delays in 
trying to reach agreement on investment projects.  Others have had 
contracts arbitrarily canceled without compensation, even though the 
Sri Lankan Cabinet had approved those contracts. 
 
Proposed laws and regulations are generally made available for 
public comment.  However, occasionally they are published without 
public discussion. 
 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
Availability of Financial Resources 
 
Retained profits finance about 70% of private investment, with short 
term borrowing financing a further 20% of investment.  The stock 
market and corporate securities market have not been significantly 
used to raise capital.  Foreign direct investment (FDI) finances 
about 4% of overall investment.  Foreign investors are allowed to 
access credit on the local market.  They are also free to raise 
foreign currency loans. 
 
The state consumes over 50% 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.  For 2009, the 
government's net borrowing from the local market is forecast to be 
Rs 183 billion ($1.6 billion).  Due to high inflation and increased 
government borrowing, interest rates were high in 2007 and 2008. 
 
Credit Instruments 
 
Commercial banks are the principal source of bank finance.  Bank 
loans are the most widely used credit instrument for the private 
sector.  Financial institutions also raise syndicated bank loans to 
fund large-scale investment projects undertaken by the private 
sector. 
 
The domestic debt market in Sri Lanka is still at a nascent stage. 
The first credit rating agency in Sri Lanka was Fitch Rating Lanka 
(www.fitchratings.lk), which opened an office in Colombo in 1999. 
Fitch Ratings Lanka is a joint venture between Fitch Ratings Inc, 
International Finance Corporation, (IFC), Central Bank of Sri Lanka, 
and several leading local financial institutions.  Credit ratings 
are now mandatory for all deposit-taking institutions and for all 
varieties of debt instruments and have helped numerous Sri Lankan 
companies raise funds through debt markets. 
 
Sri Lanka received its first sovereign credit ratings in December 
2005, with a "BB-minus" from Fitch Ratings and a "B-Plus" from 
Standard and Poor's (S&P).  Current ratings are B-Plus (Fitch) and B 
(S&P).  Both agencies have assigned a stable rating outlook for Sri 
Lanka.  These sub-investment grade ratings reflect declining foreign 
reserves, high fiscal deficits, the high level of government 
indebtedness, and weak revenue mobilization, together with political 
and security concerns. 
 
Accounting Standards 
 
There is an active and fairly 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 adopted by the International 
Accounting Standards Board (IASB).  In addition, Sri Lanka is 
following the worldwide move to adopt International Financial 
Reporting Standards (IFRS) for financial reporting purposes set by 
 
COLOMBO 00000067  014 OF 023 
 
 
the IASB.  The proposed full convergence is expected to be in 2011 
for financial periods on or after January 1, 2012.  A significant 
change is expected with full convergence. 
 
Due to the lack of an adequate enforcement mechanism problems with 
the quality and reliability of financial statements still exist. 
 
Sri Lankan accounting standards are applicable for all banks, stock 
exchange listed companies 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 published accounting standards for 
small companies as well.  The Accounting Standards and Monitoring 
Board (ASMB) is responsible for monitoring compliance with Sri 
Lankan accounting and auditing standards.  British professional 
accounting bodies are quite active in Sri Lanka.  The Chartered 
Institute of Management Accountants (CIMA), a leading professional 
accounting body based in the UK and spread over the Commonwealth, 
has its largest overseas presence in Sri Lanka.  CIMA UK suspended 
the Sri Lanka divisional council over a governance issue in December 
¶2008.  However, CIMA programs and operations in Sri Lanka, including 
member services, continue undisrupted. 
 
Securities and Exchange Commission. 
 
The Securities and Exchange Commission (SEC) regulates the 
securities market in Sri Lanka.  The SEC law was revised in 2003, 
enhancing the SEC's 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. 
 
Foreign investors can purchase up to 100% of equity in Sri Lankan 
companies in numerous permitted sectors.  In order to facilitate 
portfolio investments, country funds and regional funds may obtain 
Ministry of Finance approval to invest in Sri Lanka's stock market. 
These funds make transactions through share investment external 
Rupee accounts maintained in commercial banks. 
 
Colombo Stock Exchange 
 
The Colombo Stock Exchange (CSE) has fully automated trading, 
clearing and settlement systems.  The CSE maintains a rolling 
settlement period of 3 days.  Twenty one local and foreign joint 
venture brokers currently operate at the CSE. Foreign stockbrokers 
are permitted to hold up to 100% equity in stock brokerage firms 
operating at the CSE.  The SEC has a settlement guarantee fund with 
an initial capital of Rs 100 million ($88,500), which aims to 
guarantee the settlement of trades between clearing members of the 
exchange. 
 
There are 235 companies listed on the stock exchange with the top 
ten positions by market capitalization held by telecommunication 
companies, banks, conglomerates and food and beverage companies. 
The CSE, after being one of the best performing markets in the 
region in 2005-6, suffered in 2007-2008 due to increased 
conflict-related violence and the global financial crisis.  The 
market indices lost 41% in 2008 on top of a 7% drop in 2007. 
Recently, investors have also been discouraged by Supreme Court 
decisions negatively impacting businesses.  One ruling, citing bias 
by government officials in favor of eventual contract winner, 
reversed the 2002 privatization of a bunkering unit to a large 
conglomerate listed in the stock exchange.  A similar case is 
pending against another listed conglomerate.  In yet another case, 
the Supreme Court temporarily stopped payments due to local and 
foreign banks for oil hedging contracts.  Other issues include lack 
of liquidity and limited market size. 
 
Improvements are also needed in corporate governance, 
accountability, and public disclosure.  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. 
 
Acquisition of companies through mergers and acquisitions is 
governed by the Takeovers and Mergers Code of 1995 made under the 
Securities and Exchange Commission of Sri Lanka Act.  This law 
 
COLOMBO 00000067  015 OF 023 
 
 
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% 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. 
 
Banking System 
 
Sri Lanka has a fairly well diversified banking system.  There are 
23 commercial banks - eleven local and twelve foreign.  In addition, 
there are 14 local specialized banks.  Citibank NA is the only U.S. 
bank operating in Sri Lanka.  In late 2008, the Central Bank 
dissolved the board of directors of a private local bank and 
appointed the state owned Bank of Ceylon to carry on the business of 
the bank.  This was done to ensure stability in the overall 
financial sector following a scandal at a finance company connected 
to the bank.  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 it approached 
insolvency.  There was no fallout for other banks from this 
incident.  Two other small troubled banks were restructured under 
Central Bank guidance. 
 
The Central Bank is responsible for supervision of all banking 
institutions. It has driven improvements in banking regulations, 
provisioning, and public disclosure of banking sector performance. 
Since 2004, credit ratings have been mandatory for all banks 
operating in Sri Lanka.  In 2006, the Central Bank introduced higher 
capital requirements for commercial banks to further stabilize the 
banking system, promote consolidation, and facilitate entry of 
larger banks.  Notable progress in 2008 includes mandatory 
provisioning on performing loans and acceptance of the Basel II 
standardized approach framework.  In addition, the Central Bank 
issued corporate governance rules for banks.  The new rules are 
aimed at promoting the safety and soundness of the banking system. 
Nevertheless, the Central Bank still suffers from lack of autonomous 
authority, especially with regard to the large state owned banks. 
 
Sri Lanka has enacted laws to deal with money laundering and 
terrorist financing.  The Bank Supervision Department of the Central 
Bank supervises and examines financial institutions for compliance 
with anti-money laundering and terrorist financing regulations.  A 
Financial Intelligence Unit (FIU) was created in 2006.  The 
Financial Intelligence Unit has issued instructions to banks, 
finance and insurance companies, and the securities industry 
regarding anti-money laundering and terrorist financing regulations 
and, in 2008, extended it rules on "know your customer" and 
"customer due diligence" to insurance companies and the securities 
industry. 
 
State-Owned Banks 
 
Total assets of commercial banks stood at Rs 2,100 billion ($18.5 
billion) as of December 31, 2007.  The two state-owned commercial 
banks, Bank of Ceylon and People's Bank, with assets of Rs 437 
billion ($3.8 billion) and Rs 381 billion ($3.4 billion) 
respectively, still dominate banking, accounting for about 40% of 
all assets. 
 
The two state banks are inefficient and have accumulated extensive 
bad debt.  However, as these banks are implicitly guaranteed by the 
state, their problems have not harmed the credibility of the rest of 
the banking system.  Progress has been made in restructuring the two 
banks -- their nonperforming loan ratios declined from 18% in 2003 
to 4-6% in 2007, while provisioning and profitability have improved. 
 Nonetheless, both these banks have significant exposure to the 
state and state owned companies, which are treated as performing 
loans.  If state and state owned enterprises are excluded, the non 
performing loan ratios on the balance portfolio were over 10%. 
 
Private Commercial Banks and Foreign Banks 
 
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.  Foreign banks tend to make provisions in 
line with international best practices, as most foreign bank 
 
COLOMBO 00000067  016 OF 023 
 
 
branches are subject to host country supervision in addition to that 
of the Central Bank of Sri Lanka. 
 
Non-performing loans increased while provisioning declined in 2008. 
Non-performing loans to total loans ratio is estimated to have 
increased from 4.9% in 2007 to over 7% in 2008.  There are concerns 
regarding credit exposure to housing and consumer sectors, impact of 
high interest rates and the impact of prevailing economic conditions 
on the banking system. 
 
Capital Adequacy 
 
Sri Lanka adopted capital adequacy standards set by the Basel 
Committee on banking regulations and supervisory practices in 1993. 
The minimum capital adequacy ratio required by the Central Bank is 
5% for core capital (Tier I) and 10% for risk weighted assets (Tier 
I and Tier II).  The Central Bank adopted Pillar 1 of Basel II 
capital adequacy standard for all banks in 2008. 
 
Risk-based capital adequacy in the banking sector was 11.9% in 2006. 
 The Bank of Ceylon's capital adequacy ratio is well within Central 
Bank requirements.   People's Bank currently does not meet capital 
adequacy requirements, but it has a Ministry of Finance guarantee 
for funds required to meet its obligations.  The government has 
commenced a recapitalization program at the People's Bank to enable 
the bank to meet its minimum capital requirements. 
 
Political Violence 
------------------ 
 
Since early January 2008 when a largely defunct cease-fire agreement 
between the government and LTTE was officially abandoned, fighting 
between the Sri Lankan military, paramilitary groups and the 
Liberation Tigers of Tamil Eelam (LTTE) has increased.  Bomb attacks 
in densely populated areas have killed dozens of civilians, 
including in some areas frequented by foreign tourists.  In October 
2008, an LTTE attack using light aircraft damaged the main power 
plant in Colombo.  A U.S. company owned power plant situated 
adjacent to the plant that was attacked was unharmed.  In 2007, the 
LTTE conducted several air attacks -- one against a military base 
that adjoins the international airport north of Colombo, another on 
oil storage facilities outside Colombo.   There have been a series 
of other incidents throughout the country targeting armed forces 
personnel, politicians and civilians in 2007-2008. 
 
While the government has controlled the eastern part of the country 
since July 2007, effective securit in much of the Eastern Province 
is not yet assued. 
 
In 1997, the United States designated the LTE as a Foreign 
Terrorist Organization (FTO).  I 2007, the United States froze the 
assets of, and blocked transactions with, the Tamils Rehabilitation 
Organisation (TRO), a U.S.-registered non-profit group, on the 
grounds that it provided support for the LTTE. 
 
During two and half decades of war, foreign tourists and foreign 
business representatives have not been LTTE targets, but they have 
been injured in attacks on other targets.  In 2001, the LTTE 
attacked Colombo's international airport and destroyed commercial 
and military aircraft.  Sri Lankan Airlines, lost several commercial 
aircraft in the attack.  Prior to 2001 the LTTE attacked several 
foreign-flagged commercial ships in the waters off the north and 
east of the country.  The LTTE has also in the past bombed Colombo's 
financial and business districts, causing numerous casualties and 
extensive damage to property. 
 
Currently, Sri Lanka is included in the Lloyds Joint War Risk 
Committee's war, strikes, terrorism and related perils areas list. 
Insurers have imposed war risk premiums on ships and aircraft using 
Sri Lankan ports and airports. 
 
Corruption 
---------- 
 
Sri Lanka has generally adequate laws and regulations to combat 
corruption, but enforcement is weak and inconsistent.  U.S. firms 
identify corruption as a constraint on foreign investment, but, by 
 
COLOMBO 00000067  017 OF 023 
 
 
and large, it is not a major threat to operating in Sri Lanka - at 
least once a contract has been won.  Corruption appears to have the 
greatest effect on investors in large projects and on those pursuing 
government procurement contracts. 
 
There is a consensus that corruption is rampant in Sri Lanka.  In 
Transparency International's Corruption Perception Index for 2008 
Sri Lanka ranks 92nd with a score of 3.2 out of a possible 10 
points.  The World Bank Control of Corruption Index which ranges 
from -2.5 to +2.5 has shown an improvement to -0.13 in 2006 and 2007 
from -0.26 in 2005.  In a 2006 USAID Democracy and Governance 
assessment, anecdotal evidence from the private sector indicated 
that the percentage of a public sector contract paid in bribes 
nearly tripled.  According to Transparency International, corruption 
is perceived as most pervasive in political appointments to 
government institutions and in government procurement awards, as 
well as in high frequency/low value transactions.  The police force 
and the judiciary are perceived to be the most corrupt public 
institutions.  Corruption is also a persistent problem in customs 
clearance and enables wide smuggling of certain consumer items, to 
the detriment of legitimate manufacturers and importers. 
 
In 2008, the Supreme Court, examining public interest litigations 
against the sale of two government properties, faulted a former 
President and the Secretary to the Treasury for wrongdoing.  Both 
were fined.  The Supreme Court also removed the Secretary to the 
Treasury from his position and ruled that he cannot hold any public 
office in the future.  The Supreme Court also reversed the sales. 
 
In January 2007, a parliamentary commission found evidence of 
serious and widespread waste, fraud, and abuse in the management of 
Sri Lanka's numerous government enterprises.  Privatization of a 
handful of government enterprises between 2001 and 2004 also appears 
to have been done in a corrupt manner.  The mismanagement and 
corruption reviewed by the Commission have cost Sri Lanka an 
estimated USD 1.3 billion.  However, the government has taken little 
concrete action to date to address the commission's findings, and it 
later replaced the Commission's chairman and some of its members; 
one new appointee is the President's brother.  Following the 
commission's report, several other large scale corruption incidents 
and frauds materialized, including at the government's tax office. 
 
Sri Lanka ratified the UN Anti-corruption Convention in 2004.  Sri 
Lanka has signed but not ratified the UN Convention against 
Transnational Organized Crime.  Sri Lanka became a signatory to the 
OECD-ADB Anti-Corruption Regional Plan in May 2006. 
 
Bribery Commission Not Effective 
 
The Bribery Commission is the main body responsible for 
investigating allegations of bribery and corruption.  The function 
of the Commission, under Act No 19 of 1994, is to investigate 
allegations brought to its attention and to institute proceedings 
against responsible individuals in the appropriate court.  The law 
states that a public official's offer or acceptance of a bribe 
constitutes a criminal offense and carries a maximum sentence of 
seven years imprisonment and a fine at the discretion of the courts. 
 A bribe by a local company to a foreign official is not covered by 
the Bribery Act. 
 
Although highly publicized, efforts to investigate bribery and 
corruption by the Bribery Commission and Presidential Commissions 
have failed, damaging public confidence in such processes.  In 
February 2008, the President removed the Bribery Commission's 
Director General, the sole individual able to serve indictments. 
 
Several other government entities try to address corruption, the 
most important being the Auditor General's Department.  However, 
there is a confusion of mandates and these institutions frequently 
interpret their mandates narrowly, inhibiting their effectiveness. 
 
Bilateral Investment Agreements 
------------------------------- 
 
The Government of Sri Lanka has signed investment protection 
agreements with the United States (which came into force in May 
1993) and with the following other countries: 
 
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¶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 
 
Taxation 
 
A bilateral treaty between Sri Lanka and the United States to avoid 
double taxation was ratified and entered into force on June 12, 
¶2004. 
 
Foreign investors not qualifying for Board of Investment incentives 
such as tax and exchange control exemptions or concessions are 
liable to pay taxes on corporate profits, dividends, and remittances 
of profits.  They are also liable to pay a Value Added Tax on goods 
and services.  The government has also imposed a tax of 0.1% 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. 
 
An Economic Service Charge (ESC) at 0.25% of income applies to 
BOI-approved companies enjoying tax holidays, from the fourth year 
of operation.  The government proposed in late 2008 to charge ESC 
from the first year of operation with effect from April 1, 2009. 
 
The Embassy encourages prospective U.S. investors to contact an 
international auditing firm operating in Sri Lanka to assess their 
tax liability. 
 
OPIC and Other Investment Insurance Programs 
 
The United States 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 
U.S. 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. 
 
The U.S. Embassy and other U.S. Government institutions spend over 
$13 million annually 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. 
 
Labor 
----- 
 
Labor Force 
 
Sri Lanka's labor force is literate (particularly in local 
languages) and trainable, although weak in certain technical skills 
and the English language.  The average worker has eight years of 
schooling.  Two-thirds of the labor force is male. 
 
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The unemployment rate has declined in recent years to around 6%. 
The rate of unemployment among women and high school and college 
graduates, however, has been proportionally higher than the rate for 
less-educated workers.  Youth and entry-level unemployment and 
underemployment remain a problem.  A significant proportion of 
unemployed people seek "white collar" jobs.  However, most sectors 
seeking employees offer manual or semi-skilled jobs or require 
technical or professional skills such as management, marketing, 
information technology, accountancy and finance, and English 
language proficiency.  The construction, plantation and apparel 
industries report a shortage of workers.  Some investors have faced 
problems in finding sufficient employees with the requisite skills. 
 
 
The government has initiated educational reforms it hopes will lead 
to better preparation of students and better matches between 
graduates and jobs.  More computer, accounting and business skills 
training programs and English language programs are becoming 
available.  But the demand for these skills still outpaces supply. 
 
 
Migrant Workers Abroad 
 
There are an estimated 1.5 million Sri Lankan workers abroad. 
Remittances from migrant workers, at around $2.7 billion, are one of 
Sri Lanka's largest sources of foreign exchange.  The majority of 
this labor force is unskilled (housemaids and factory laborers) and 
located primarily in the Middle East, but Sri Lanka is also losing 
many of its technically and professionally qualified workers to more 
lucrative jobs abroad.  Remittances from migrant workers will likely 
decline in 2009.  At least one labor importing country, South Korea, 
temporarily stopped importing labor from Sri Lanka starting in early 
¶2009. 
 
Wages and Holidays 
 
Labor is available at relatively low cost, though it is priced 
higher than in some other South Asian countries.  Productivity lags 
behind other countries in Asia.  Child labor is prohibited and is 
virtually nonexistent in the organized sector, although 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. 
 
Many believe that Sri Lanka's labor laws and its numerous official 
holidays dampen productivity.  The full moon day of each month 
(sacred in the Buddhist faith), if it falls on a weekday, is a paid 
holiday.  There are eight other public holidays.  The public sector 
and banks enjoy additional holidays.  These statutory holidays are 
in addition to 21 days of annual/casual leave and approximately 21 
days of sick leave (the number of days for sick leave is at the 
discretion of the management).  Further, female employees are 
entitled to 84 days fully paid maternity leave for the first two 
pregnancies.    Female workers are permitted 60 hours of overtime 
work per month. 
 
The Government continues to interfere with private sector wage 
setting.  In October 2005 the Government, through an act of 
Parliament, took steps to mandate a wage increase (of approximately 
Rs 1,000 ($8.85) per month) to private sector workers.  The private 
sector is concerned about such interference in wage setting, which 
could damage competitiveness in certain sectors. 
 
Termination Laws 
 
The Termination of Employment of Workmen Act (TEA) makes it 
difficult to fire or lay off workers who have been employed more 
than six months for any reason other than serious, well-documented 
disciplinary problems.  Disputes over dismissals can be brought to a 
labor tribunal administered by the Ministry of Justice.  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. Recent amendments to the 
Industrial Disputes Act (IDA) include labor dispute resolution rules 
 
COLOMBO 00000067  020 OF 023 
 
 
to expedite the dispute process. 
 
The government has introduced a standard compensation formula under 
the TEA to facilitate termination.  The compensation formula takes 
into account the number of years of service and offers 2.5 months 
salary as compensation for 1 year of service, 12.5 months salary for 
5 years of service; 38 months for 20 years and up to a maximum of 48 
months salary for 34 years service.  According to the World Bank's 
Doing Business 2009 report, Sri Lanka's firing cost is among the 
highest in the world.  For example, Sri Lanka's firing cost for 20 
years of service, at 38 months, compares with Pakistan and Nepal's 
22.5 months, India's 19.6 months, Malaysia's 18.5 months, China's 
13.2 months and Bangladesh's 11.7 months.  The Labor Commissioner's 
approval or the affected employee's consent is required to fire 
workers.  The Labor Commissioner's approval is often subject to 
delays of around 6-7 months.  Employers complain that the package is 
excessive, especially compared to international norms.  They have 
also pointed out that higher compensation could adversely affect 
companies requiring restructuring, and discourage investment. 
 
Trade Unions 
 
About 20% of the 7 million-strong work force is unionized, but union 
membership is declining.  There are more than 1,900 registered trade 
unions (many of which have 50 or fewer members), and 19 federations. 
 About 15% of labor in the industry and service sector is unionized. 
 Most of the major trade unions are affiliated with political 
parties, creating a highly politicized labor environment.  Several 
trade unions with affiliations to major political parties have 
formed themselves into an organized group, the National Association 
for Trade Union Research and Education (NATURE), to promote 
education and training among trade unionists. 
 
All workers, other than police, armed forces, prison service, and 
those in essential services, have the right to strike. By law, 
workers may lodge complaints to protect their rights with the 
commissioner of labor, a labor tribunal, or the Supreme Court.  The 
president retains the power to designate any industry as an 
essential service. 
 
Unions represented workers in many large private firms, but workers 
in small-scale agriculture and small businesses usually did not 
belong to unions. Public sector employees were unionized at very 
high rates.  Labor in export processing zone enterprises tends to be 
represented by non-union worker councils. 
 
Unions have complained that the Board of Investment and some 
employers, especially in the BOI-run export processing zones, 
prohibit union access and do not register unions on a timely basis. 
Employers allege that the JVP, a Marxist political party opposed to 
private enterprise, could provoke labor to strike under the pretense 
of trade union activity.  Due to the JVP's violent past, employers 
are generally not in favor of it or its trade union arm, the 
Inter-Company Trade Union. 
 
In BOI enterprises, including those in the export processing zones, 
worker councils composed of employees generally engage in labor and 
management negotiations.  These worker councils have functioned well 
in some companies in providing for worker welfare.  The BOI has 
requested that companies recognize trade unions and accept 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. 
 
The International Labor Organization's (ILO) Freedom of Association 
Committee has observed that Sri Lankan trade unions and employee 
councils can co-exist, but advises that there should not be any 
discrimination against those employees choosing to join a union. 
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 that 
the Government address these issues. 
 
In response to these observations, the BOI revised its labor manual 
in March 2004, requesting that companies located in export 
 
COLOMBO 00000067  021 OF 023 
 
 
processing zones 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. 
 
In 2008, the American Federation of Labor and Congress of Industrial 
Organizations (AFL-CIO) submitted a petition to the United States 
Trade Representative seeking suspension of Generalized System of 
Preferences (GSP) benefits for Sri Lanka due to labor rights 
violations in some factories in the export processing zones. 
AFL-CIO submitted a similar petition in 2002, which was rejected. 
USTR did not act on the 2008 petition by year's end.   A Sri Lanka 
trade union made a similar case with the European Union (EU) 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 the country's efforts to implement core labor 
standards.  The EU, however, urged improvements in freedom of 
association. 
 
Key public sector entities such as the Ceylon Electricity Board and 
the Sri Lanka Ports Authority also have large unions which have 
protested anticipated moves towards privatization or restructuring. 
In July 2006, the Supreme Court broke a port slowdown which had 
disrupted shipping through the Colombo Port for over a week. 
However, in response to a challenge lodged by several unions, the 
ILO Freedom of Association Committee noted that the port "go-slow" 
action did not disrupt an essential service, i.e. one whose 
disruption would endanger life, personal safety or health of the 
whole or part of the population. 
 
Collective Bargaining 
 
Collective bargaining is not yet popular. Employers' Federation of 
Ceylon, the apex employers association in Sri Lanka assists its 
member companies to negotiate with unions and sign collective 
bargaining agreements.  While about half of the 500 members of the 
Employers' Federation of Ceylon is unionized, currently 135 of these 
companies (including a number of foreign-owned firms) are bound by 
collective agreements.  As of September 2007, there were only three 
collective bargaining agreements signed in companies located in 
export processing zones. 
 
Labor-Management Relations 
 
Formerly confrontational labor-management relations have improved in 
the last few years as employers have worked harder to motivate and 
care for workers.  Work stoppages and strikes in the private sector 
are on the decline.  While labor-management relations vary from 
organization to organization, managers who emphasize communication 
with workers and offer training opportunities generally experience 
fewer difficulties.  U.S. investors in Sri Lanka (including U.S. 
garment buyers) generally promote good labor management relations 
and labor conditions that exceed local standards. 
 
ILO conventions 
 
Sri Lanka is a member of the International Labor Organization (ILO) 
and has ratified 31 international labor conventions.  The labor laws 
of Sri Lanka are laid out in almost 50 different statutes.  The 
Ministry of Labor has published a Labor Code, consolidating 
important labor legislation.  Sri Lanka has ratified all eight of 
the core labor conventions included in the 1998 ILO Declaration on 
Fundamental Principles and Rights at Work.  ILO Convention 138 on 
minimum age for admission to employment and Convention 182 on worst 
forms of child labor were ratified during 2000-2001.  Sri Lanka 
ratified ILO convention 105 on Forced Labor in 2003.  The ILO and 
the Employers' Federation of Ceylon are working to improve awareness 
of core labor standards.  The ILO also promotes its Decent Work 
Agenda program in Sri Lanka. 
 
Foreign Trade Zones/Free Ports 
------------------------------ 
 
Sri Lanka has 12 free trade zones, also called export-processing 
zones, administered by the BOI.  The oldest, the Katunayake and 
 
COLOMBO 00000067  022 OF 023 
 
 
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 mini 
export-processing zones are located in provinces.  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.  In addition, a large private 
apparel company opened Sri Lanka's first privately run fabric park 
in 2007.  The company invites local and foreign companies to set up 
fabric and apparel factories in this eco-friendly park. 
 
In the past, firms preferred to locate their factories near Colombo 
harbor or airport to reduce transport time and cost.  However, 
excessive concentration of industries around Colombo has caused 
heavy traffic, higher real estate prices, environmental pollution, 
and scarcity of labor.  The BOI and the government now encourage 
export-oriented factories to set up in industrial zones farther from 
Colombo.  However, Sri Lanka's poor roads make these outlying zones 
less appealing. 
 
Foreign Direct Investment Statistics 
------------------------------------ 
 
Investment Trends 
 
From 1998-2001, foreign direct investment (FDI) flows to Sri Lanka 
averaged only about $150 million per year (excluding privatization 
receipts).  The 2002 ceasefire improved investor confidence, pushing 
annual Foreign Direct Investment (FDI) averages to about $200 
million.  In 2006, FDI increased to about $450 million and in 2007 
to about $550 million centered on telecommunications, business 
process outsourcing, and hotel and restaurant services. 
 
U.S. Investments 
 
Total cumulative U.S. investment in Sri Lanka is estimated to be in 
the range of $200 million.  Major U.S. investors include:  Energizer 
Battery, Mast Industries, Smart Shirts (a subsidiary of Kellwood 
Industries), Chevron, Citibank, Caterpillar, 3M, Coca Cola, Tandon 
Corporation, Paxar Corporation, Pepsi Co, Sportif, Worldquest, Fitch 
IBCR, AES Corporation, American International Group (AIG), American 
Premium Water, Virtusa, Avery Denison, North Sails, Amsafe Bridport, 
RR Donnelly (through Office Tiger and Revlon (through its Indian 
subsidiary).  Several Sri Lankan-Americans have started IT and BPO 
companies in Sri Lanka serving the US market.  In addition, IBM, 
Lanier, NCR, GTE, Motorola, Procter & Gamble, Liz Claiborne, Tommy 
Hilfiger, J.C. Penney, 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. 
 
Non-U.S. Investments 
 
Leading sources of foreign direct investment in Sri Lanka are 
Malaysia, the United Kingdom, the United States, Singapore, India, 
China, the UAE, and Korea.  Major non-U.S. investors include: 
Unilever, Nestle, British American Tobacco Company, Mitsui, Pacific 
Dunlop/Ansell, Prima, FDK, Telekom Malaysia Bhd, S.P. Tao, HSBC and 
the Indian Oil Corporation.  In 2008/9, India's Bharathi Airtel 
invested in mobile cellular services.  Leading U.S. and foreign 
investors that have acquired significant stakes in privatized 
companies include Chevron,  Hanjung Steel of Korea, Mitsubishi 
Corporation and C. Itoh (A.K.A. Itochu) of Japan, Emirates Airlines 
of United Arab Emirates, Shell Oil of the UK, and the Indian Oil 
Corporation. 
 
Web Resources 
------------- 
 
Board of Investment of Sri Lanka:  www.boi.lk 
 
International Monetary Fund (IMF) Sri Lanka country information: 
 
COLOMBO 00000067  023 OF 023 
 
 
www.imf.org/external/country/LKA/index.htm 
 
 
Article VIII obligations of the International Monetary Fund: 
www.imf.org/external/pubs/ft/aa/aa08.htm 
 
U.S.-Sri Lanka Bilateral Investment Treaty: 
www.state.gov/documents/organization/43588.pd f 
 
Institute for the Development of Commercial Law and Practice: 
www.iclparbitrationcentre.com 
 
Indo-Lanka Free Trade Agreement:  www.doc.gov.lk 
 
South Asian Free Trade Area:  www.saarc-sec.org/main.php 
 
Fitch Ratings Lanka:  www.fitchratings.lk 
 
Development Assistance Database:  www.dad.tafren.gov.lk 
 
 
BLAKE