US embassy cable - 04COLOMBO1717

UNCLAS SECTION 01 OF 02 COLOMBO 001717 
 
SIPDIS 
 
DEPT FOR EB/CBA DWINSTEAD, SA/INS 
COMMERCE FOR ITA:ASTERN 
 
SENSITIVE 
 
E.O 12958: N/A 
TAGS: ETRD, ECON, EINV, CE, ECONOMICS 
SUBJECT: THE INVESTMENT CLIMATE IN SRI LANKA - 
PROBLEM AREAS AND SUCCESS STORIES 
 
1.  (U) The agenda for the bilateral Trade and 
Investment Framework (TIFA) meeting includes an 
opportunity for the USG to discuss the current 
investment climate with the GSL.  This message 
describes Post's experiences over the past year. 
 
2. (U) Sri Lanka continues to offer both promise 
and peril for US investors.  Numerous companies 
with products or services in traditional sectors, 
such as manufacturing, in Board of Investment export 
processing zones are successful, with little help. 
Other firms have needed significant Embassy advocacy 
to receive fair treatment (see para 5).  Inefficient 
bureaucracies, inconsistent policies, no delegation 
of decision-making authority and political pressure 
have prevented some American companies from 
implementing their business plans. 
 
3. (SBU) In the energy sector especially, US companies 
face bureaucratic and, it appears, politically motivated 
delays and non-payment.  AES Power, Alstom Power Rentals 
and Lionvert Refineries have each experienced serious 
delays in project implementation and been victims of 
reneging on contractually agreed payment terms. 
Currently, the Embassy advises extreme caution for US 
investors in the power sector, with the primary culprit 
being the ineffective and, reportedly, highly corrupt, 
Ceylon Electricity Board.  Despite repeated interventions 
by the Ambassador at the Minister level and to the 
President's Office, Post has not been able to resolve the 
payment disputes, though there may be some recent movement 
in the protracted approval process for Lionvert. 
 
4. (SBU) Cabinet approval is required for virtually all 
decisions related to government spending initiatives. 
Several US companies have experienced project implementation 
delays because government Ministers simply don't present 
their cases to the cabinet for approval.  ESP, a US company 
with an approved vehicle emissions testing program, is one 
example. Despite no cost to the GSL, and the support of 
numerous high-level figures in the Government (including, 
reportedly, the President), the Transport Minister has 
refused to raise the issue at Cabinet, citing worries about 
"political fallout."  Unless Sri Lanka takes steps to develop 
a transparent government procurement and investment framework 
that can proceed with approvals far below cabinet level, it 
will continue to see less than optimal FDI inflows. 
 
5. (SBU) Despite many obstacles, Post has been able to assist 
firms to achieve their goals.  Below is a list of cases that 
have been supported by Post. 
 
Success Stories 
--------------- 
--  GTech, an online lottery service, experienced numerous 
difficulties, ranging from specious court cases by competitors 
to unfounded allegations of bidding improprieties.  Embassy 
advocacy over the past nine months contributed to resolution, 
and the planned launch in December.  This $12 million investment 
is expected to produce revenues of $10 million per year starting 
the second year. 
 
--  Fiserv and IBM requested Embassy assistance when they felt 
they were not being treated fairly during a government-owned 
banking tender.  Embassy pressure to make the choice on 
qualifications, rather than for political reasons, helped these 
firms win the $10 million deal. 
 
--  Commercial Lynks is the largest supplier of soybeans to Sri 
Lanka.  This firm had numerous problems with a government tender 
and tariff issues, which the Embassy addressed with the GSL. 
They now are supplying to the market and the government without any 
hitches. 
 
--  Intervention by the Embassy, including a letter from Ambassador, 
was credited with encouraging the resolution of a labor dispute at 
Energizer, which threatened to shut the factory for good.   Energizer 
went ahead with a new $2 million investment in the plant which 
supplies the local battery market. 
 
--  Colombo Copper, a US firm successfully utilizing the Indo-Lanka 
Free Trade Agreement to export to India, had problems when 
competitors sidestepped the value-added requirements to undercut 
prices and swamp the market.  Embassy advocacy with the Ministry of 
Commerce assisted in closing down these non-compliant competitors. 
 
--  Working with the Department of Commerce's Advocacy Center, the 
Embassy protested against the choice of a non-competitive foreign 
firm for an ADB-funded port software project.  Post's efforts, along 
with others, led to this decision being overturned, and allowed the 
favored US firms to compete fairly. 
6.  (U) USG officials could cite the first three cases during TIFA 
discussions for examples of successful US business endeavors, but 
should also note with concern the fact that US companies continue to 
suffer frustrating setbacks, particularly in important infrastructure 
sectors like energy. 
 
Lunstead