VZCZCXRO2425
PP RUEHBI RUEHCI RUEHLH
DE RUEHLM #0010/01 0071225
ZNR UUUUU ZZH
P 071225Z JAN 10
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 1079
INFO RUEHKA/AMEMBASSY DHAKA PRIORITY 2236
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 9258
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 7513
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3669
RUEHCG/AMCONSUL CHENNAI PRIORITY 9820
RUEHKP/AMCONSUL KARACHI PRIORITY 2636
RUEHCI/AMCONSUL KOLKATA PRIORITY 0496
RUEHLH/AMCONSUL LAHORE PRIORITY 0122
RUEHBI/AMCONSUL MUMBAI PRIORITY 7109
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 04 COLOMBO 000010 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT PLEASE PASS TO UNITED STATES AGENCY FOR 
INTERNATIONAL DEVELOPMENT 
 
E.O. 12958: N/A 
TAGS: CE EAGR EAID ECON EFIN ETRD PGOV PHUM
SUBJECT: EASTERN SRI LANKA MAKES POST-WAR ECONOMIC 
PROGRESS; ECONOMIC RESENTMENT LINGERS 
 
REF: A) COLOMBO 1109 B)COLOMBO 1136 
 
¶1.     (SBU)  Summary.  The Government of Sri Lanka (GSL) 
touts the 'economic success' in Eastern Sri Lanka, where the 
fighting ended in 2007, as its blueprint for the 
reconstruction of Northern Sri Lanka.  Econoff found that the 
base economy in the East of paddy rice farming and fishing 
has bounced back, the GSL has improved the road network, and 
the number of security checkpoints has been reduced.  Two new 
apparel factories have been established, albeit with heavy 
subsidies, and there is tourism development potential. 
However, the GSL has not been effective in overcoming other 
impediments to economic development.  Most strikingly, there 
is local resentment that large Sinhalese companies from 
Colombo are receiving the prime tourist plots and government 
contracts to the exclusion of local entrepreneurs.   End 
Summary. 
 
Background on the Eastern Province 
 
¶2.    (U)  Econoff visited two of the three districts in the 
Eastern Province, Batticaloa and Trincomalee.  Batticaloa is 
almost entirely agricultural with little or no industry.  A 
local business leader estimated that the Batticaloa 
population is 80% Tamil and 20% Muslim with almost no 
Sinhalese Buddhists.  Trincomalee has paddy rice production 
and fishing, but also possesses the world,s second largest 
natural harbor and several industries.  The population of 
Trincomalee is almost evenly split between Tamils, Muslims 
and Buddhists. 
 
Basic Agricultural and Fishing Economy Bounces Back 
 
¶3.    (U)  Agricultural rice production and the fishing 
industry have quickly bounced back in both Batticaloa and 
Trincomalee.  The Government Agent in Batticaloa described 
how paddy rice production has more than doubled since the end 
of the war in 2007,  increasing from 25,000 hectares in 2007 
to 58,000 hectares in 2009.  Moreover, the fish catch rose 
from 10,000 metric tons in 2007 to 17,000 metric  tons in 
¶2009.  The dramatic increases in paddy production and fish 
catch were confirmed by business and NGO contacts.  The 
pattern is the same in Trincomalee, where paddy rice 
cultivation has increased from 150,000 hectares in 2007 to 
200,000 hectares in 2008 and 227,000 hectares in 2009. 
Similarly, the fish catch has also increased sharply.  A 
government aligned academic stated that the GDP had risen 16% 
in the East as abandoned land has been put back into 
production. 
 
¶4.    (SBU)  All of the local contacts, from government 
officials to business leaders to NGOs, agreed that the GSL 
has substantially improved the road system in the Eastern 
Province.  Much of the road improvements have been funded 
with Tsunami resources from donors.  The road system still is 
not complete; the primary roads in Trincomalee were new but 
the roads in Batticaloa were in worse shape.  The GSL has 
also improved the rural roads, but they are still below the 
national roads in the East.  The improved roads have brought 
real benefits in terms of reduced agricultural spoilage 
during transportation (40% of the crops was lost before), and 
better roads for tourists.  There still are problems.  There 
were heavy rains during econoff,s trip, and some bridges 
were un-passable and some people were cut off in a remote 
area. 
 
¶5.    (SBU)  Although there are still many checkpoints, there 
are fewer than before, so security checkpoints no longer 
appear to be a major drag on commerce.  USAID,s office on 
Connecting Regional Economies (CORE) conducted a study of 
logistics in the East, and  found that security checkpoints 
were a major impediment to trade before the end of the Tamil 
Tiger war in May 2009.  At that time  trucks went through 
multiple checkpoints where they frequently needed to unload 
their cargo, taking hours at each checkpoint and sometimes 
damaging the cargo.  There have been dramatic improvements, 
with  many fewer checkpoints, and drivers are stopped only if 
 
COLOMBO 00000010  002.3 OF 004 
 
 
they do not have proper documentation.  Econoff observed many 
checkpoints, but almost all cars and trucks were lazily waved 
through, and usually the checkpoint was empty.  Our contacts 
did state that there are still some roads which are off 
limits to civilians, and security around key areas, such as 
the port or government officials, remains tight. 
 
Tourism is the Sector with the Most Near Term Potential 
 
¶6.    (SBU)  Although the East has world class beaches and 
other tourist attractions, so far only domestic tourists are 
visiting  Eastern Sri Lankan, and long term growth will 
depend on greatly improved tourist facilities.  According to 
the CORE study sponsored by USAID, the East Coast only has 
eight 'graded' hotel establishments, with 230 beds.  The 
occupancy rate in these hotels was 22% in 2008, but this has 
increased so much in Trincomalee (due to domestic tourism) 
that it can be hard to get a room in one of the few decent 
hotels there.  The accommodations in Batticaloa are well 
below international standards, and members of the Batticaloa 
Chamber of Commerce said that travelers usually do not stop 
there but stay in neighboring districts.   The growth in 
International tourism would be aided by a large airport, but 
the Trincomalee airport only has a couple of flights per 
week.  Tourists must take a day long trip each way from 
Colombo in order to visit. 
 
¶7.    (SBU)  As part of the GSL,s goal to increase tourist 
arrivals from 500,000 per year to 2,500,000 by 2016, the GSL 
is allocating land for tourist development in Trincomalee . 
Our contacts agreed that all or almost all of the prime 
tourist land was being allocated by the government to Colombo 
(Sinhalese) firms, and local companies were being shut out. 
The Government Agent for Trincomalee (appointed by President 
Rajapaksa and in charge of the area) said that he allocated 
land based on factors such as capacity to develop 
international hotels, financing, experience and environmental 
considerations.  The government agent, Major General de 
Silva, added that the local companies simply do not have the 
capacity to build a large international hotel.  Members of 
the Trincomalee Chamber of Commerce implicitly agree, by 
arguing that the government needed to provide them with bank 
loans and allow them to build small hotels or guest houses. 
Other contacts alleged that the prime tourist land was 
distributed by the GSL based on favoritism.  In any case, 
although Colombo firms have taken the land, they have not 
begun work, but they are waiting until after the upcoming 
elections season to begin investing.  The CORE study projects 
that if hotel construction begins in the next two years, it 
will be up to five years until the hotels are open and 
operational.  Progress in Batticaloa is much further behind, 
as the local business leaders are discussing building a 
single three star hotel to house business travelers. 
 
¶8.     (SBU)  The port of Trincomalee is the second largest 
natural harbor in the world (after Rotterdam), but it has not 
served as a catalyst for regional development.  The 
Trincomalee  Port has three large companies: Prima Wheat 
Mill, Indian Oil Company and Toyota Cement, and each company 
has a private dock to import their industrial inputs.  The 
main dock is little used aside from some shipments of coal. 
The port director has big plans to create a dry dock for 
repairing ships and gaining some of the regional 
transshipment trade.  None of our other business or 
government contacts foresee any major development of the 
Trincomalee Port, other than an Indian-financed coal power 
plant.   According to a CORE study, the Port of Trincomalee 
receives 4% of the Sri Lankan import cargoes, measured by 
weight.  Econoff met with GSL officials in Colombo, who have 
great plans to expand the Port of Colombo (currently 
receiving 95% of Sri Lanka,s cargo) and to build an enormous 
port in President Rajapaksa,s home region of Hambantota in 
the South, but few plans are underway to expand the Port of 
Trincomalee. 
 
¶9.    (SBU)  The GSL plans to expand Trincomalee,s 
industrial base are having limited success.  Sri Lanka is not 
 
COLOMBO 00000010  003 OF 004 
 
 
keeping their present industrial base happy.  The Prima Wheat 
mill has plans to expand, but it has been unable to do so for 
two years because they have not received the required 13 
permits.  Indian Oil is also frustrated that the government 
prevents it from importing more oil and opening more service 
stations, since the Indian Oil service stations  compete with 
the government gas stations.  When asked about the 
Trincomalee business climate, one business leader said that 
he would not recommend investing in Trincomalee because there 
is too much red tape and the wage costs are increasing.  The 
GSL established an export processing zone near Trincomalee, 
but despite constructing several buildings they have been 
unable to lure any companies to the EPZ.   Even the successes 
create problems.  The GSL has an agreement to build an 
Indian-financed coal plant in the Port of Trincomalee, but to 
clear the necessary land the GSL has relocated  2,000 people 
from their land to new government allocated land, which has 
generated complaints.  There are two apparel factories in the 
East, Brandix and TriStar.  Econoff visited Brandix, 
established by a large Colombo company with the laudatory 
goal of bring together workers from the Sinhalese, Tamil and 
Muslim communities.  The GSL has provided heavy subsidies 
through a five year income tax holiday for the entire company 
to the Brandix factory.    USAID in a public/private 
partnership is financing training for the 600 local workers 
from all three ethnic communities, many of whom are war 
widows, former combatants, or women from Internally Displaced 
Persons camps.  Brandix even requires the work teams to eat 
lunch together, or else the different ethnic groups would 
self segregate for lunch.  The Brandix factory is not yet 
profitable, however, as there has been heavy turnover of 
30-40% (Muslim girls in particular quit due to family 
pressure), and Brandix must work on soft work skills with 
their employees, such as the importance of coming to work on 
time every day.  Econoff visited the factory, which was short 
staffed due to a threat of poor weather, and observed a good 
portion of the workers chatting rather than industriously 
sewing clothes.  Econoff was also told that the TriStar 
factory receives heavy subsidies, although it was not clear 
if these were more than the  five year tax holiday.. 
 
Impediments to Increased Economic Development 
 
¶10.   (SBU)  Land issues are a major problem in the East. 
The local government has a difficult time determining land 
title, since the LTTE controlled certain areas for years and 
people who were forcibly evicted from their lands are coming 
back and demanding their land.  The Government Agent of 
Batticaloa stated that land title is an enormous headache. 
In urban areas the title owners may have left 20-30 years 
ago, then other people have lived in the houses and improved 
them, or bought and sold them.  The government experiences 
the same problem in Trincomalee, and there the GSL gives the 
returnees new land instead of their original plots.  The 
situation in the country is even harder, because many paddy 
farmers never had property title in the first place.  The 
land was left uncultivated for years due to the war, and now 
the government is trying to allocate land between the current 
occupants and the returnees.  Several representatives of the 
United Nations thought that the government was distributing 
land based on favoritism and bribes, and that the land issue 
has stirred up ethnic division.  Land title is also required 
for bank financing. 
 
¶11.    (SBU)  Although state and private sector banks have 
increased their branches in the East, local business leaders 
still cannot get loans.  Members of the Batticaloa and 
Trincomalee Chambers of Commerce complained bitterly that 
they could not receive bank loans because there were too many 
paper requirements, and they lacked proper land title or 
other collateral, so they turned to the informal market where 
the interest rates were twice as high.  A regional 
representative from Hatton National Bank reported that it was 
hard to find good projects for lending, and they only lend 
out 45% of the money taken in through deposits. 
 
¶12.   (SBU)  There are also several cases where water 
 
COLOMBO 00000010  004 OF 004 
 
 
shortages restrict economic growth.  The East has ample 
rainfall three months for one paddy rice crop, but the second 
crop requires irrigation.  Water shortages can create 
problems for industry.  For example, a proposed pineapple 
processing plant never materialized because the GSL  could 
not guarantee water supplies. 
 
¶13.   (SBU)  Eastern farmers and fisherman are also impacted 
by the lack of storage facilities and value added food 
processing.  Since they cannot store their rice or fish 
catch, farmers and fishermen must sell immediately to Colombo 
middlemen to transport the goods, reputedly at very low 
prices.  The East also exports raw fish, with no processing, 
so there is less value added.   There is progress in the 
dairy sector, where, with USAID assistance, there are new 
milk storage facilities so cattle farmers receive higher 
returns. 
 
¶14.   (SBU)  The GSL Board of Investment (BOI) provides 15-20 
year tax holidays for investments in the North and East, but 
locals have little enthusiasm for the BOI incentives. 
Although large Colombo companies are receiving BOI 
incentives, members of the Batticaloa Chamber of Commerce 
said that locals did not know how to write proposals, they 
did not have the proper collateral of capacity, so none of 
them have received BOI incentives. 
 
¶15.   (SBU)  The Tamil Diaspora could be an enormous resource 
for Eastern reconstruction, but the Diaspora has not invested 
yet.  Our contacts gave several possible reasons, including 
that they were waiting for the political situation to 
stabilize, they were afraid that investment funds could be 
seized by the GSL, or they did not feel safe yet. 
Nevertheless, some Diaspora had visited the East, some were 
interested, and locals hoped that investments would come in 
the future. 
 
Strong Ethnic Tension 
 
¶16.   (SBU)  Our contacts saw all local issues, from 
government allocation of land and contract awards, through an 
ethnic prism. Several contacts worried that Tamils and 
Muslims were being shoved aside in favor of Sinhalese from 
Colombo or the South.  The area still felt militarized, with 
frequent security checkpoints, although people were waved 
through.  Former military leaders hold key unelected 
positions and represent the federal government, such as 
Eastern Province Governor Rear Admiral Wijewickrema  and the 
Trincomalee Government Agent Major General De Silva, (both 
appointed by the GSL).  Several Tamil contacts also reported 
that they must register with the GSL when they travel to 
Colombo, which is not required of others.  In general, ethnic 
identity and resentment are just below the surface in the 
East. 
 
¶17.   (SBU)  Comment.  The GSL has successfully brought back 
paddy rice production and fishing, but the way forward is 
much harder.  The GSL can pursue some ethnically neutral 
development strategies such as road building, incentives for 
apparel factories, and improved storage facilities.  However, 
the region,s best immediate bet is tourism, and the local 
companies simply do not have the capacity to build 
international quality hotels.  The GSL could set aside some 
plots for local investors, but it has not done so.  The GSL 
policy to award land to Colombo developers, combined with 
issues of land allocation for returnees, has helped 
exacerbate a tense ethnic situation.  In short, the East has 
recovered its basic agricultural capacity, but improvements 
in the economy have not yet ameliorated ethnic tension.  End 
Comment. 
 
BUTENIS