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Koggala Export Processing Zone PPIE - Public Manufacturing Enterprise' T E TAR:SRI 23426 This Report has been prepared for ASIAN DEVELOPMENT BANK the exclusive use of the Bank. Disclaimer : the PDF file attachment may not contain the complete text index. For documents generated from scanned hard-copies, there may be portions of viewable text that cannot be copied as selectable text as this is dependent on the quality of scanned documents. CURRENCY EQUIVALENTS (As of 30 June 1990) Currency Unit Sri Lankan Rupee (SRs) $ 1.00 Rs 39.78 SRs 1.00 $0.02516 For the purpose of calculation In the Report, a rate of $ 1.00 Rs 40.00 has been used. This was the rate generally prevailing during the time the Technical Assistance was formulated. ABBREVIATIONS EPZ - Export Processing Zone OCEC - Greater Colombo Economic Commission IPC - Industrial Policy Committee KGEPZ - Koggala Export Processing Zone PPIE - Public Manufacturing Enterprise'. PTC - Presidential Tariff Commission •I'ì141 (1) In this Report, "$" refers to US dollars. (ii) The fiscal year of the Government coincides with the caleñdar year. Disclaimer : the PDF file attachment may not contain the complete text index. For documents generated from scanned hard-copies, there may be portions of viewable text that cannot be copied as selectable text as this is dependent on the quality of scanned documents. (i) I SRI LANKA -4 C LOCATION OF THE PROPOSED KOGGALA EXPORT PROCESSING ZONE (KGEPZ) .4 N. --.-- / SRI LANKA '.----- / ).., ' .c \ (OEIYAYA - . Eityi IC! COLOCO GALLE DISTRICT MOAWAA y , MATARA DI5T ICT '--- tryCd.no loot o.-l.' OCE.j AKIESSA AkmHnuol H.I4m.o GAI.Lt / I.ACOLZO —-- OGGALA MATAA 0 Kiometer PROPOSED LAYOUT OF THE KGEPZ . I WI H Pr/ Qvrr LEG ENr .' ..... wrQ I-I Site fOr Sewage Treatment Flint WT site for Water Tower C.E.C. Service P.t.a ProosreG 14.GEPZ Bourary T0 (BoundaT not necuarliy authoritetivi) Disclaimer : the PDF file attachment may not contain the complete text index. For documents generated from scanned hard-copies, there may be portions of viewable text that cannot be copied as selectable text as this is dependent on the quality of scanned documents. I. INTRODUCTION 1. During the Bank's Country Consultation mission to Sri Lanka in March 1990, Government representatives stressed the need for diversifying the country's economic base through the provision of suitable infrastructure for creating investment, employment and income opportunities. For this purpose, the Government proposed to set up an Export Processing Zone (EPZ) -at Koggala in the Southern Province and requested Bank Technical Assistance for a feasibility study of the proposal. In tlay 1990, a Bank Mission followed up the request. In June 1990, a Fact-Finding Mission visited: Sri Lanka to formulate the Technical Assistance for the Koggala Export Processing Zone Study. 2. The Mission met with officials of the Government, the representatives of the Greater Colombo Economic Commission, private sector entrepreneurs and various multilateral andbilateriai agencies, and visited the sites of existing EPZs near Colonibo and the planned site for the Koggala EPZ. This report is based on the discussions and information obtained during the Mission. The proposed Technical Assistance first appeared in the AD8 Business Opportunities in June 1990. - - II. BACKGROUND A. Economic Settin g - Performance and Prospects 3.. The Sri Lankan economy responded modestly to the measures taken by the. Government in 1977 to enhance the country's economic activity through greater private sector participation, particularly in. the industrial sector. The large public investment program started by the Government at about the same time provided a stimulus for growth. However, since the mid-1980's, there has been a decline in the economic performance due to structural constraints, civil disturbances (since 1983), deterioration in the terms of trade and weak economic management. 1. Notwitstanding the decline in the economic performance, Sri Lanka's basic capacity for growth remains strong, and the country still has considerable natural and human resources. The new Government formed in March 1989 has clearly indicated its commitment to growth-oriented adjustment reforms, while emphasizing its concern for more equity in the distribution of the benefits of development. The most serious constraints on the country's economic development have been structural in nature, and include: a large investment-savings gap and a consequent heavy reliance on foreign borrowings; a narrow agricultural export base resulting in trade and current account imbalances; a large and Inefficient public sector; and various constraints on the private sector. To remove these constraints and to achieve a higher level of sustainable growth, the Government drew us macroeconomic stabilization and medium term adjustment programs with assistance from IMF and the World Bank. The adjustment programs emphasize - private sector participation, and equitable growth. 5. Since the last. quarter of 1989, the level of social unrest has declined particularly in the.south of-the country. This has offered opportunity for the Government to undertake reconstruction and rehabilitation and implement its reforms in the : region. - Disclaimer : the PDF file attachment may not contain the complete text index. For documents generated from scanned hard-copies, there may be portions of viewable text that cannot be copied as selectable text as this is dependent on the quality of scanned documents. B. Industrial Sector: 0biectives Constraints and Polic y Initiatives 6.. Industrialization has been an important development policy objective of the Government. The development of Sri Lanka's industrial sector is considered essential for providing employment to a large and growing labor force and the need to broaden the economic base from its narrow concentration on plantation crops. Until 1977, industrial development was based on policies emphasizing import-substitution and state interventions which resulted in low economic growth and balance-of-payments problems. A shift in policies in 1977 did not alter the importance the Government assigned to industrial sector de.'elopment. In fact, under the policies introduced in 1977; the Government expected to achieve industrial growth and employment even more rapidly by enhancing the exposure of the economy to market forces, by encouraging industries with an export- potential, and by developing an industrial sector that could withstand international competition. - A review of the industrial sector shows that the Government's development objectives have not been achieved fully. Contributing less than 15 per cent of GOP and providing employment to only 10 per cent of the country's labor force, manufacturing remains a relatively small-.sector of the economy, despite a high level of protection. The major factors underlying the sector's small contributionto growth are: Ci) preponderance of poorly performing Public Manufacturing Enterprises (PMEs); (ii) a high rate of effective protection; (iii) business environment which has discouraged private investors, with its cumbersome bureaucratic procedures and licensing requirements; and (iv) limitations on foreign private- investment which is restricted by regulations and taxes such as a 100 per cent tax on transfer of jquity shares to foreigners. 8. With due recognition of the constraints on industrial development, the recent (1987) reports of the Industrial Policy Committee (IPC) and the Presidential Tariff Commission (PlC) have addressed the key issues involved and' made several recommendations. The IPC proposes, that barring few exceptional cases, all PMEs be sold to the private sector. The IPC and PlC reports also re-commend reduction in the average rate of effective protection (from 100 per cent to about 50 per cent), as well as reduction in the dispersion of effective protection across sectors. As a-first step, the 1988 budget brought the maximum nominal tariff of 100 per cent down to 60 per cent, stipulated a minimum tariff of 5 per cent, and eliminated all import licensing requirements excepting those needed on health or security grounds. 9. The Government is taking steps to improve the business environment and the private sector's confidence. In the 1990 budget, three measures announced by the Government are noteworthy: (i) lifting of all restrictions on foreign equity participation except in specifically reserved areas and elimination of 100 per cent tax on transfer of equity shares to foreigners; (ii) reforming the quota allocation system to exporters of garments with a view to eliminating trade in unused quotas. Effective July 1989, quotas for garment exports to the United States and the European Community were made fully transferable, and the annual increase in quotas negotiated with importing countries will be auctioned from the quota year 1990-1991; and (iii) the appointment of a high-level committee to look into industrialists' recurrent complaints regarding cumbersome and time-consuming bureaucratic processes. Disclaimer : the PDF file attachment may not contain the complete text index. For documents generated from scanned hard-copies, there may be portions of viewable text that cannot be copied as selectable text as this is dependent on the quality of scanned documents. 3 C. Exoort Promotion: Incentives and Ex-Post Exoerience 10. In its drive to develop an export-oriented economy, Sri Lanka has introduced a number of export promotion measures and developed a range of fiscal incentives. The primary objectives of the export promotion schemes are: providing exporters
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