US embassy cable - 02COLOMBO2346

UNCLAS SECTION 01 OF 04 COLOMBO 002346 
 
SIPDIS 
 
DEPT PASS USTR 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EINV, CE, USTR, CWC 
SUBJECT:  SRI LANKA: COMMERCE A/S LASH PUSHES INVESTMENT 
CLIMATE ISSUES 
 
 
1. Summary:  Following up on President Bush's July commitment 
to Prime Minister Wickremesinghe to examine areas for greater 
economic engagement with Sri Lanka, William H. Lash III, 
Assistant Secretary of Commerce for Market Access and 
Compliance, brought a Commerce Department delegation to Sri 
Lanka December 19-20 to assess areas for economic and 
commercial engagement with the Government of Sri Lanka (GSL). 
A/S Lash used his visit to press GSL to improve the investment 
climate and to approve several pending proposals by U.S. 
companies.  He delivered these messages during separate 
meetings with Minister of Commerce and Consumer Affairs Ravi 
Karunanayake, Minister of Finance K.N. Choksy and Board of 
Investment Chairman Arjunna Mahendran.  A/S Lash also engaged 
leading business representatives to hear their concerns on Sri 
Lanka's investment climate.  A press conference by A/S Lash led 
to widespread coverage of the visit.  The visit succeeded in 
focusing the GSL on steps it needs to take to strengthen its 
trade and commercial ties with the U.S. End Summary. 
 
2. William H. Lash III, Assistant Secretary of Commerce for 
Market Access and Compliance, brought a Commerce Department 
delegation to Sri Lanka December 19-20 to assess areas for 
economic and commercial engagement with the Government of Sri 
Lanka.  The Commerce Department delegation consisted of A/S 
Lash; J.V. Schwan, Counselor to A/S Lash; Linda Droker, 
Director for South Asia and Oceania; and Art Stern, India/Sri 
Lanka Desk Officer. 
 
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Meeting with Minister of Commerce 
--------------------------------- 
 
3. A/S Lash met on December 20 with Minister of Commerce and 
Consumer Affairs Ravi Karunanayake.  A/S Lash began by 
explaining that his visit was a direct outcome of the 
President's commitment to Prime Minister Wickremesinghe, made 
during their July meeting at the White House, to examine areas 
for greater economic engagement with Sri Lanka.  The U.S. is 
following closely Sri Lanka's economic reforms, he said.  Sri 
Lanka had already pulled ahead of the rest of South Asia in 
terms of openness and average standard of living, in spite of 
years of conflict.  Now, with the prospects for peace stronger 
than ever, the best way for Sri Lanka to attract foreign 
investment, and thereby raise average income levels, is to 
improve further its investment climate. 
 
4. A/S Lash went on to exhort Sri Lanka to become an example 
within South Asia of sound IPR protection.  Effective IPR 
protection, he said, was a key factor for U.S. companies when 
evaluating countries for potential investment.  With many U.S. 
firms considering technology and patents their greatest assets, 
domestic protection of this property will be critical to Sri 
Lanka attracting investments in knowledge-based industries such 
as IT.  Karunanayake said that GSL has prepared TRIPS-compliant 
IPR legislation that it expects to enact soon; the legislation 
is currently before the Cabinet and will be debated in 
Parliament in early February.  A/S Lash replied that 
legislation was a good and necessary first step, but that 
enforcement of IPR was equally important.  Many countries have 
solid IPR legislation on the books, but fail in enforcing it; 
Sri Lanka should set the regional standard for IPR not just in 
word but in deed as well.  Karunanayake professed to understand 
the need for enforcement, and asked for U.S. help in training 
customs officials, police and judges; A/S Lash undertook to 
examine areas for possible U.S. assistance. 
 
5. A/S Lash asked Karunanayake about the status of GSL's import 
regulations on biotech foods.  While the U.S. was gratified 
that Sri Lanka indefinitely delayed its proposed ban on biotech 
food last year, we want to ensure that the Sri Lankan market 
remain open to biotech foods.  Karunanayake assured A/S Lash 
that the biotech ban would not return.  A/S Lash cautioned GSL 
against adopting any mandatory labeling scheme for biotech 
foods, pointing out that the U.S. objects strongly to any 
requirement that manufacturers certify and disclose levels of 
biotech content.  WTO rules call for trade regulations to be 
based on science, and there is no scientific evidence to 
warrant restrictions of any kind, including mandatory labeling, 
on biotech foods.  Karunanayake again assured A/S Lash that Sri 
Lanka's market would remain open to biotech foods, pledging 
that Sri Lanka would not adopt a mandatory labeling scheme. 
 
6. A/S Lash also used the meeting with Karunanayake to press 
the GSL to move forward with several pending U.S. commercial 
projects.  He noted that Sri Lanka is interested in attracting 
interest from more U.S. companies; the best way to do so is to 
enlist champions of Sri Lanka in corporate America - companies 
that have been successful doing business here and will 
encourage others to invest as well.  A/S Lash raised 
Caterpillar's proposal before GSL to provide 100 MW of power 
generation; the U.S. expects a transparent process in awarding 
the tender, and hopes that Caterpillar's project will be 
approved.  A/S Lash also brought up Tamsco's signed contract 
with the Sri Lankan Ministry of Defense to supply radar spares, 
which has been held up now for over a year; the principle of 
sanctity of contracts is at stake, and the U.S. expects GSL to 
honor its obligations in this contract in a timely manner. 
Finally, A/S Lash mentioned IMC Global's long-running proposal 
to mine phosphate in Eppawela (north-central Sri Lanka), noting 
that the project had the potential to be Sri Lanka's biggest- 
ever foreign investment. 
 
7. A/S Lash noted that there are several sectors where U.S. 
companies could pursue business in Sri Lanka.  Companies like 
Caterpillar are already exploring the power sector, but there 
are numerous other U.S. firms who could bring expertise to Sri 
Lanka in the broader infrastructure sector.  IT is another area 
where U.S. companies will likely show interest, provided they 
can be assured of sound intellectual property protection.  In 
addition, A/S Lash urged GSL to open up its educational system 
to private institutions, noting the demonstrated competitive 
advantage of the U.S. in this sector. 
 
8. Karunanayake inquired about the AFL-CIO's recent petition to 
USTR to revoke Sri Lanka's GSP privileges.  (Note: The AFL- 
CIO's petition asks for revocation of GSP for Sri Lanka based 
on alleged restrictions on union activity in Export Processing 
Zones here.  End Note.)  A/S Lash explained the background of 
the GSP program and the role of the private sector and NGOs in 
the certification process.  The U.S. government makes GSP 
decisions on the basis of all relevant information, he said, 
and it was impossible to predict what the outcome would be in 
Sri Lanka's case. 
 
9. Karunanayake also asked for "swing" on quota items, noting 
that keeping employment going in the apparel industry would be 
critical to Sri Lanka's prospects for peace.  A/S Lash 
explained the extreme difficulties in making any changes to the 
quota system.  Many countries - including many very close U.S. 
allies - have requested quota swing and come away empty-handed. 
A/S Lash promised to look into the matter but made it clear he 
was not optimistic. 
 
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Meeting with Minister of Finance 
-------------------------------- 
 
10. A/S Lash and Ambassador Wills met on December 20 with 
Minister of Finance K.N. Choksy.  They discussed many of the 
same themes A/S Lash covered above with the Minister of 
Commerce, including the Caterpillar, Tamsco and IMC Global 
proposals.  A/S Lash asked Choksy about the status of GSL's 
economic reform program.  Choksy detailed the government's 
privatization efforts, highlighting what the government had 
already sold stakes in (petroleum, buses, telecom) and what 
were the next items on the block (insurance, banking).  A/S 
Lash raised government tender procedures and the need for 
complete transparency at every stage of the process.  Choksy 
said he hoped the privatizations would further decrease the 
government's role in tenders.  For any remaining public 
tenders, GSL has set up a board to speed up the process; only 
tenders above a certain threshold ($2.5 million) would need to 
go to the Cabinet for approval. 
 
11.  Choksy emphasized his government's desire for greater 
commercial engagement with the U.S., noting that two-way trade 
was currently heavily in Sri Lanka's favor.  Choksy asked what 
the high-potential sectors for U.S. companies in Sri Lanka 
might be.  A/S Lash and the Ambassador listed infrastructure 
(especially power), IT and education as the key sectors where 
U.S. companies could profitably participate.  A/S Lash noted 
that education in particular was an area where the U.S. has a 
competitive advantage; opening up Sri Lanka to private 
education would attract interest from major U.S. institutions, 
whose presence here would bring big benefits to the Sri Lankan 
populace. 
 
-------------------------------- 
Meeting with Board of Investment 
-------------------------------- 
12.  A/S Lash and Ambassador Wills met with Board of Investment 
(BOI) Chairman Arjunna Mahendran December 20.  After viewing a 
BOI video presentation on what Sri Lanka offers the foreign 
investor, A/S Lash encouraged Mahendran to keep pushing 
economic reform within the government.  The foreign investor 
looks closely at issues such as transparency, intellectual 
property protection and the level/pace of privatization.  A/S 
Lash cautioned Mahendran against letting other countries in the 
region export their IPR violations to Sri Lanka.  If Sri Lanka 
does a better job cracking down on import of pirated products, 
U.S. investors will be more inclined to trust their 
intellectual property assets to this market.  Improving the 
local educational system, A/S Lash added, would enable Sri 
Lanka to supply skilled workers in the quantities that foreign 
investors demand.  A/S Lash encouraged Sri Lanka to open its 
educational system across the board to private operators, from 
vocational training to university and professional education; 
many U.S. institutions would likely show interest in entering 
the Sri Lankan educational market.  A/S Lash also emphasized 
the importance of Sri Lanka raising its profile in the U.S., 
now that peace was developing.  He pressed for Sri Lanka to 
approve pending commercial deals (Caterpillar, Tamsco and IMC 
Global), explaining again the importance of cultivating 
champions of Sri Lanka in corporate America. 
 
-------------------------------------- 
Meetings with Business Representatives 
-------------------------------------- 
 
13.  In a December 20 working breakfast hosted by the American 
Chamber of Commerce, A/S Lash elicited the views of senior 
AmCham members on the investment climate in Sri Lanka.  Members 
described the local environment for business as generally 
positive - few restrictions on imports, a talented and literate 
labor force and a BOI that truly streamlines investment 
approvals.  AmCham members raised several concerns, though. 
Many commented that Sri Lanka's labor laws were too restrictive 
(especially regarding terminations), discouraging possible new 
investors from entering the market.  Telecom policy was also a 
big hindrance to productivity.  Though the government had 
nominally sold off part of Sri Lanka Telecom, the company still 
controls the market in the absence of a truly independent 
telecom regulator.  As a result bandwidth is poor and line 
charges are high.  Members also decried the current level of 
IPR protection in Sri Lanka, noting that GSL seems reluctant to 
crack down on pirated knock-offs brought in from China.   A/S 
Lash emphasized that a main goal of the increased commercial 
engagement with Sri Lanka was to improve the atmosphere for 
U.S. companies doing business here.  He asked AmCham reps to 
continue to provide input to U.S. officials, so the U.S. can 
prod Sri Lanka toward greater openness and transparency. 
 
14.  A/S Lash also met December 20 with the Ceylon Chamber of 
Commerce (CCC), Sri Lanka's oldest and most active business 
chamber, to hear members' views on the local investment climate 
and opportunities for U.S. companies.  A/S Lash emphasized the 
need for greater two-way trade between the U.S. and Sri Lanka, 
noting that the trade imbalance was currently 10:1 in Sri 
Lanka's favor.  Chamber members offered that the best prospect 
for increasing U.S. exports was textile fabric, and that the 
CCC was looking for ways to connect U.S. textile suppliers with 
Sri Lankan apparel manufacturers.  A/S Lash asked members what 
their biggest concerns were on the investment climate. 
Political instability, including the still nascent peace 
process, and a poor tertiary education system were the greatest 
obstacles to growth, members said.  A/S Lash pressed CCC to 
lobby the government hard to open the education system, noting 
that major U.S. institutions could play an active and positive 
role in the Sri Lankan education sector.  Members praised the 
USAID-funded competitiveness initiative for its role in 
developing certain sectors and asked for additional technical 
assistance in education, job creation and vocational training. 
 
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Media reaction 
-------------- 
 
15. Lash's visit generated lavish press coverage.  A December 
13 Embassy press release announcing his visit appeared in 
independent and government-owned dailies, both English and 
vernacular, under headlines such as "American trade minister 
arrives," "U.S. Asst. Secretary of Trade will be in Sri Lanka 
next week," and "U.S. Asst. Trade Secretary's visit to Sri 
Lanka."  On December 20 the "Financial Times" section of the 
DAILY MIRROR (independent English daily) carried Lash's picture 
and c.v., plus a table of U.S.-Sri Lanka trade data under the 
headline "US trade with Sri Lanka."  On December 20 the 
Assistant Secretary and Ambassador Wills convened a press 
conference for Sri Lanka's business, commercial, and finance 
journalists.  The conference resonated in English and 
vernacular newspapers through the weekend.  "Lanka's chances of 
attracting foreign investment in IT look rosy - US Asst. 
Commerce Secy" said the ISLAND (opposition English daily).  A 
similar story appeared in DINAMINA (government-owned Sinhala 
daily) under the headline "Sri Lanka has achieved the 
capabilities to attract foreign investment in many spheres." 
THINAKARAN (government-owned Tamil daily) quoted Lash: 
"Conducive environment for investment in Sri Lanka."  The 
MIRROR focused on Lash's compliance message with a story 
headlined "US wants Lanka to nab pirated imports," and the 
ISLAND followed suit with "US seeks crackdown against pirated 
software, movies and music here."  And many of the Island's 
dailies highlighted the linkages that the Assistant Secretary 
and the Ambassador drew between peace and prosperity.  One 
example:  "Peace will grow Lanka-US investment, trade" 
(MIRROR). 
 
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Comment 
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16. A/S Lash's visit reinforced many of the same messages 
delivered by Deputy USTR Ambassador Huntsman during the first 
meeting of the bilateral Trade and Investment Council last 
month.  It is now clear to GSL that achieving an enhanced trade 
relationship with the U.S. will depend on its moving 
aggressively to improve the local investment climate.  A/S 
Lash's emphasis throughout the visit on IPR protection sent a 
strong signal to GSL that the U.S. will be watching its 
progress on this issue in particular in the coming months.  To 
a large extent, we will be able to gauge GSL's commitment to 
overall reform by how quickly and fully it improves IPR 
legislation and enforcement. 
 
17. A/S Lash has cleared this cable. 
WILLS