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P 141019Z DEC 09
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 0969
INFO RUEHNE/AMEMBASSY NEW DELHI 3590
RUEHKA/AMEMBASSY DHAKA 2158
RUEHIL/AMEMBASSY ISLAMABAD 9192
RUEHKT/AMEMBASSY KATHMANDU 7437
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RUEHGV/USMISSION GENEVA 3902
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 02 COLOMBO 001136 
 
SIPDIS 
 
STATE FOR SCA/INSB, EEB/APRATTIPATI 
STATE PASS USTR FOR VICKY KADER 
TREASURY FOR SUSAN CHUN 
COMMERCE FOR ITA EROL YESIN 
 
E.O 12958: N/A 
TAGS: ECON SOCI PGOV CE
SUBJECT:   Business Leaders See Progress in Eastern Reconstruction; 
Challenges Remain 
 
¶1. Summary:  A/S Robert Blake met with a group of business leaders 
to discuss reconstruction of the conflict regions of the North and 
East.  The Government of Sri Lanka (GSL) defeated the LTTE in 2007 
in the East, and there has been great progress in that region, with 
fewer checkpoints, improved roads, and agricultural and even some 
industrial development.  The GSL just defeated the LTTE in the North 
in May 2009, and security concerns and resettlement issues have 
limited an economic rebound in the North so far.  The business 
leaders identified several common challenges to development in these 
regions, namely education and vocational training for the workforce, 
water and land for agricultural production, and transportation 
facilities.  A/S Blake discussed ways that the USG and the Diaspora 
might help, perhaps through private partnerships to promote 
education.  End Summary. 
 
¶2. A/S Blake met with seven companies who are active in Eastern Sri 
Lanka, a regional Chamber of Commerce, and United States Agency for 
International Development representatives, to learn about the 
business climate in the East, the successes and challenges faced by 
their companies in the East, and their experiences, if any, in the 
North.  The businesses had experience in agriculture, tourism, 
logistics, apparel, and banking.  The GSL has held up the East as a 
success story, which they hope to recreate in the North. 
 
------------------------------------------ 
Progress in the East; Not Yet in the North 
------------------------------------------ 
 
¶3. The business leaders agreed that that the North and East have 
tremendous potential in agriculture, with a good share of Sri 
Lanka's most fertile land, fisheries (underutilized due to wartime 
restrictions on fishing boats), tourism with virtually untapped 
beaches and islands, and industries such as apparel manufacturing. 
These representatives saw substantial progress in reconstruction in 
the East.  Several companies with plants in the East stated that the 
number of security checkpoints had declined dramatically, which was 
very important in allowing them to transport their goods 
efficiently.  The checkpoints were a particular problem for 
agricultural produce, which can spoil if it takes too long to get to 
market.  These companies also felt that the security situation had 
improved.  The representatives praised the GSL for work improving 
the national and regional roads, although some roads still need 
work.  The business chamber representative noted that small and 
medium sized enterprises in the East were not doing as well as the 
large Sri Lankan conglomerates. 
 
¶4. The North has shown much less progress in economic development so 
far.  The North has great potential in tourism, but to date there 
have been few, if any, tourists; instead, people who previously 
lived in these areas are returning to see them.  Two business 
chambers are planning trips to the North, one from Colombo to lure 
local and Diaspora investors, and another from the Southeast to 
assess business opportunities.   In general, the business leaders 
thought that economic development would take time, and - since the 
war just ended in May - many people are just being resettled in 
their homes, infrastructure is being built, and approximately 
100,000 Internally Displaced Persons (IDPs) are still in camps. 
 
----------------------------------------- 
Obstacles to Further Economic Development 
----------------------------------------- 
 
¶5. The business leaders identified several key challenges before the 
East (and by extension the North) can reach their full potential. 
 
-- The workers in the East have very low productivity in 
agricultural work and other fields, which will require a great deal 
of education, vocational training, and life skills.  An agribusiness 
conglomerate representative said that many former IDPs did not want 
to work in agriculture.  Moreover, they do not have the necessary 
knowledge, leading to a large shortage of laborers with the right 
skills.  There is a need for technology transfer to improve skills 
 
COLOMBO 00001136  002 OF 002 
 
 
and productivity.  Other business leaders agreed that although there 
was a large pool of unemployed workers, they needed training and 
skills to fill positions ranging from agriculture to apparel to 
clerical work. 
 
-- Agricultural producers need water, land and more cows.  Both 
agricultural and business companies said that one of their most 
pressing needs was additional water supplies, gathered through 
better rainwater collection or conservation techniques.  Although 
some businesses had sufficient land, others, especially agriculture, 
had trouble getting enough land to grow crops, especially since the 
government reserved much of the land for rice paddy production. 
Finally, the North and East have great potential for dairy 
production, but not enough cows.  It will take 7-10 years to build a 
good herd through natural breeding. 
 
-- There are substantial transportation needs.  A garment 
manufacturer had difficulty getting workers to its factory, so it 
created its own bus service.  The fishing industry is constrained 
because there are insufficient cold storage facilities, so after 
traveling over hot roads the fish can spoil before they get to a 
local market or the port for export. 
 
-- GSL policies are sometimes misguided and they do not promote 
economic growth.  The GSL provides generous incentives to investors, 
such as 25-year tax-free holidays for investors in the North, and 
15-year tax-free holidays in other parts of Sri Lanka.  These 
business contacts emphasized that they need infrastructure more than 
tax-free holidays, since the tax incentives primarily benefit them 
if they are making a profit.  Moreover, sometimes government 
policies are contradictory.  The GSL had a policy to encourage rice 
production, but when the price of rice went too high, the GSL 
imposed price controls which reduced the farmers' incentives to grow 
rice. 
 
-- Although banks have opened branches in the North and East, they 
primarily take in deposits and do little lending.  The Central Bank 
has encouraged many banks to open branches in the North and East, 
and the banks have done so.  The banks are taking in large deposits, 
but there still is little credit, and a bank representative said 
that his bank of lends out only 20% of their deposits.  A/S Blake 
asked about micro lending.  Business representatives responded that 
micro lending is cost effective due to administrative costs, so they 
prefer to lend to small, medium, and large enterprises. 
 
----------------------------------- 
Options to Increase Economic Growth 
----------------------------------- 
 
¶6. The business representatives had three ideas that could increase 
economic growth.  The first, and most important, is to tap the 
skills and resources of the Diaspora.  Although there is interest, 
the Diaspora has not yet returned, although some are sending 
remittances to relatives.  A/S Blake said that he plans to meet 
Diaspora representatives to seek their engagement through 
public-private partnerships to provide education and vocational 
training, and the business leaders were supportive of this concept. 
Several of the companies work with USAID, and they were pleased with 
the worker training and agricultural technical assistance that they 
received.  Therefore, the GSL could focus on these areas instead of 
tax holidays.  Another possibility is to develop industrial parks in 
the East and North, alleviating the problems of land, water, and 
worker transportation.  Finally, the USG could assist through the 
Overseas Private Investment Corporation (OPIC), and a business 
consultant urged an OPIC mission to the area. 
 
¶7. A/S Blake's staff has cleared this cable. 
 
BUTENIS