Tuesday, November 23, 2010

Sri Lanka's Postwar Boom Not Enough to Lure Investors Wary of Corruption

With a postcard view of white sand and fishermen drawing in nets from the morning catch, the Chaaya Blu Hotel could be mistaken for a resort in Bali or Phuket. In fact it’s in Trincomalee, Sri Lanka, a country that 18 months ago saw the bloodiest battles of a three-decade civil war.

“You went out every day not knowing what would happen,” said Richard Vokes, the country director for Asian Development Bank. Vokes used to don a flak jacket and helmet before traveling the heavily guarded 160 mile (257 kilometer) journey to the north-eastern city from the capital Colombo.

Since government forces defeated the Tamil Tigers rebels in May 2009, the sandbags and checkpoints have mostly gone. In the capital, tourists stroll along the palm-fringed seaside promenade while locals fly kites in front of Colombo’s British colonial-era Galle Face Hotel. Living in Sri Lanka is now “a very pleasant experience,” said Vokes, whose bank had almost $2 billion in loans to Sri Lanka at the end of 2009.

The Manila-based lender expects Sri Lanka’s economy to grow as much as 8 percent this year and next. Colombo’s stock market is the world’s second-best performer in 2010, after Mongolia, nearly doubling in value. A $1 billion sovereign bond issued in late September was 6.3 times oversubscribed.

Visits from foreigners have risen 40 percent so far this year and may top 600,000 for 2010, according to the government, which aims to raise the number to 2.5 million by 2016, enticing travelers with white-sand beaches, leopard safaris and mountain temples.

‘Closed Shop’

“Sri Lanka has been a closed shop for 30 years,” said Joseph Michael Suresh Brito, chief executive officer of Colombo- based Aitken Spence Hotel Holdings, which is building a $40 million villa resort on the south coast with Bangkok-based Six Senses Resorts & Spas. “People will come with no fear.”

Overseas investors remain concerned about corruption and red tape. Foreign direct investment fell to $208 million in the first six months, from $253 million in the same period of 2009.

“There is a lot of renewed interest, but most of it is yet to be realized,” said Nick Nicolaou, Sri Lanka chief for London-based bank HSBC Holdings Plc.

Tourism is one of the top three industries the government is counting on to reduce Sri Lanka’s reliance on the garment trade and low-end manufacturing. At least six hotels are in the works, including a $150 million resort by Hong Kong’s Shangri-La Asia Ltd. on a former military helipad on Colombo’s waterfront.

Resort Refurbishing

John Keells Hotels Plc. spent $40.5 million refurbishing the Chaaya Blu and is building a $20 million, 200-room resort in Beruwala, south of Colombo, said Krishan Balendra, president of corporate finance & group strategy at parent company John Keells Holdings Plc, Sri Lanka’s largest listed company.

The government is promoting back-office and call-center operators, which already employ 60,000 and may bring in revenue of $350 million this year. By 2015 the government hopes business processing outsourcing, or BPO revenue will reach $1 billion.

“The BPO potential is very high,” says Nicolaou at HSBC, which employs 1,800 people doing back-office work in Colombo.

Agricultural exports, the third priority, grew 21 percent in the first eight months of the year, as farms that lay fallow during the conflict yield crops of rice, lentils, and beans.

Investment Rules

Sri Lanka is also aiming to boost investment flows in and out of the country, with the government yesterday loosening foreign-exchange controls. Sri Lankans will be allowed to invest in shares overseas and foreigners to invest in Sri Lankan corporate bonds. Authorities said they will reduce levies on tourism and construction companies.

Overseas investors say the Board of Investment, a government agency that must approve foreign-funded projects, makes it difficult to do business in the country.

“It’s fair to say we could improve our services,” said the board’s chairman, Jayampathi Bandaranayake, adding that the new focus on priority areas will simplify the approval process and offer more incentives to investors.

Berlin-based watchdog Transparency International ranked Sri Lanka 91st out of 178 countries on Oct. 26 in terms of corruption, one spot behind India and 90 places below Singapore.

While Bandaranayake of the BOI acknowledges that corruption is a problem, he said it’s no worse than in neighboring nations.

In July the European Union rescinded Sri Lanka’s preferential trade access because of the country’s human rights record, particularly due to violence in the final weeks of the war that killed as many as 15,000 civilians.

European Criticism

Presidential spokesman Lucien Rajakarunanayake said human rights issues are “the highest priority” for parliament and called the EU conditions “unacceptable.”

Some investors are concerned by the growing power of President Mahinda Rajapaksa. After Rajapaksa was elected to a second term in January and his party swept elections in April, parliament lifted the two-term limit for the presidency. Three of Rajapaksa’s brothers hold top government posts and his 24- year-old son is in parliament.

“We haven’t seen evidence of it yet, but if the family’s power is used in the wrong way, then we have a big problem,” said Mark Mobius, who holds Sri Lankan stocks and bonds as part of the $33 billion he manages at Templeton Asset Management Ltd.

One country quick to take advantage of the boom is China. A $455 million loan from the Export-Import Bank of China paid for a 300-megawatt power plant, Sri Lanka’s first coal-fired facility, at Norochcholai, a coastal village 120 kilometers north of Colombo. The plant is scheduled to open next year.

Chinese Loans

Another $560 million in loans from China will go toward new roads, including a 32-kilometer expressway from the capital to its airport. Chinese companies are building a $1.4 billion port in Hambantota and a $210 million airport in nearby Mattala.

China Merchants Holdings International Co., which has stakes in ports that move about a third of China’s container traffic, has teamed up with Aitken Spence to build a $450 million container terminal in Colombo port.

“We aim to be among the 10 largest ports in the world by 2020, up from 27th last year,” said Sri Lanka Ports Authority Chairman Priyath B. Wickrama in his office in a 19th century warehouse with exposed teak beams, overlooking a 6.8 kilometer breakwater being built by Seoul-based Hyundai Engineering & Construction Co.

Swiss cement maker Holcim Ltd.’s Sri Lanka business is up 22 percent this year, thanks to construction of roads, bridges and buildings in war-ravaged areas like Trincomalee, said Stefan Huber, Sri Lanka CEO for the Jona-based company.

“There are already a lot of hotel projects like Chaaya Blu,” he said. “It’s a great time to be here.”

To contact the reporter on this story: Frederik Balfour in Hong Kong at fbalfour@bloomberg.net.

source - www.bloomberg.com

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