Kaizen

Port City more crucial by the day so don’t delay

Originally appeared on The Morning

By Dhananath Fernando

Debt repayments, human rights issues, credit rating downgrades and pandemic make Port City our big hope.

The company Google maintains the idea of “10X thinking”. What 10X thinking means is that if one is serious about innovation, one would ideally improve things by 10 times, rather than by 10%. While Google believes we have to move at 10 times the speed for real transformation, the Japanese believe in a business philosophy that goes by the name “Kaizen”. The Kaizen theory emphasises that small-scale productivity improvements, if done consistently, with the engagement of employees, will lead to effective transformational change over time.

In hindsight, looking at Sri Lanka’s development pipeline, our own 10X ideas or Kaizens are not something we can be too proud of. We’ve hardly had any 10X ideas, and have had little consistency in our policy. In fact, one could say that the only consistent aspect of our policy is that it is inconsistent.

One of the main 10X ideas for Sri Lanka that this column has extensively discussed is land reform, chiefly through building a digital land registry that could infuse capital into the economy and improve agricultural productivity. The other 10X idea we have on our table is the Colombo Port City, a project by China Harbour Company. 

The reclamation of 269 hectares of land was completed in January 2019. The construction of the water breaker was completed in June the same year. In this backdrop, it has been reported in the media that last week the Cabinet approved the Colombo Port City Economic Bill, which allows the establishment of a special economic zone within Port City.

What is so special about Port City? I am sure most Sri Lankans would say they know nothing much, other than the fact that it is a Chinese investment, and an ambitious project to build a city on the sea. Many view it as an infrastructure project to build a financial city with tall buildings, including hospitals, residential areas, hotels and schools, and many other ancillary services, to make Sri Lanka a financial hub. 

Then the main question we have to ask ourselves is: Why would investors want to come to Port City? The simple reason is that the Port City would act like a special economic zone with special laws and regulations. Therefore, it would be a more convenient place to operate. Secondly, reduced regulations would make it easy to connect with other centres, creating a conducive environment to make profits.

However, people are largely unaware that the new law in force in the Port City actually makes it a project with 10X additions, and gives it an opportunity to become a financial hub in the region. The significance is not in the skyscrapers or other physical infrastructure, but instead lies in its potential to create an easier operating environment with lower regulations.

The next question you may ask is: Why do we need a new law for the Port City? Why can’t it fall under existing Sri Lankan business law? The answer to that is simple: If businesses in Port City come under Sri Lankan law, and under the current jurisdiction and regulatory framework – starting from business registration to resolving a business conflict, or any transaction for that matter – then these businesses would experience the same inconvenient and cumbersome process of doing business that all investors in Sri Lanka presently have to endure.

To attract an investor to Port City, the laws and regulations it comes under should facilitate the creation of speedy business services, and have significant synergies in productivity, thereby significantly lowering business transaction costs. In addition, the laws incorporated will have to be competitive and on par with other competing financial hubs, such as Singapore.

The draft law will be a critical factor that determines the future of this multi-billion dollar project. It has to be competitive with other financial centres in the region if it is to succeed. If it fails to meet these standards, investors have no reason to bring their money, or to move their financial institutes and headquarters to Sri Lanka.

We cannot comment on this law until it is placed before Parliament, but we know for sure that this should have happened far earlier. The Port City project was launched in September 2014, but even after seven years, investors are yet to see this law. This is essential to their investment decisions.

Under the previous Government, it was reported that some attempts were made in drafting the law, but it was not presented to Parliament, and the project was on hold for renegotiation. While the Cabinet clearance of the Colombo Port City Economic Bill could renew hope for the project, we should not delay the process further. At the same time, we have to be absolutely confident that the law has been drafted with the right specifications to meet investor expectations. Because of the current delay in producing the legal draft to Parliament and getting it approved, a quick sale on land in Port City has been affected. Just by the sale of land, or 99-year lease agreements, the Government expects a minimum of $ 1.8 billion in revenue, and $ 3.4 billion for the China Harbour Company. However, in making an investment calculation, we look at not only the amount of money we invest, but also the time spent.

According to State Minister of Money, Capital Markets and State Enterprise Reforms Ajith Nivaard Cabraal, out of $ 32 billion expected in foriegn currency inflows to the country, $ 15 billion in exports and about $ 7-8 billion in remittances has been forecasted. More than $ 3 billion is expected in total only for this year in the form of Foreign Direct Investment, and the main investments are expected through the Port City project. Therefore, the development of the Port City is a significant source of income for the country.

With mounting debt repayments for the next three to four years, and now with the UN Human Rights Council’s human rights-related issues, we should understand the importance of the collective effort of maintaining Sri Lanka’s image as a credible global partner. In this backdrop, placing all our investment expectations into the sole basket of the Port City is going to prove risky.

Let’s think through this in the shoes of an investor. Imagine you have about $ 1 billion and you’re considering investing in the Port City project. But to date, you do not know the law that will be enforced, while concerns have been raised by the UNHRC. In addition, the country’s credit rating has been downgraded by rating agencies, particularly in the face of the pandemic. Would you, as an investor, confidently bring your $ 1 billion to Sri Lanka – or would you delay the investment and consider markets such as Singapore, Malaysia, and Vietnam?

On the other hand, the Government has to be very careful of the potential opposition from anti-competition lobby groups who will be affected by the Port City. A successful Port City project means the presence of international law firms, IT professionals, health care workers, and education experts; opening up competition with the best of talent and skill at the global level. Sri Lanka’s experience in the recent past has not been very positive when it comes to opening up to competition. Our strategy has always been to look inwards, rather than outwards.

Therefore, the Government has the twin challenge of first getting the legal draft right and getting it out fast; and providing investors with confidence and addressing investor expectations with a collective effort of easing businesses in Sri Lanka. Secondly, the Government will have to manage the resistance that is likely to pop up from lobby groups for changes in the legal draft, blocking international competition in certain sectors. 

If we are serious about a transformed Sri Lanka, we need a combination of Kaizens and 10X ideas; meaning we have to consistently implement 10X ideas for a significant period of time. But only time will tell what we will do.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.