The Study on the FDI Promotion Policy Review and SEZ Development Strategy for Sri Lanka -Half Million Jobs Creation Plan 2011-2020- Study Report March 2011 Engineering and Consulting Firms Association, Japan Japan Development Institute (JDI) PHOTOS Colombo Port Expansion Project Colombo Port Katunayake Export Processing Zone Cement Factory in Trincomalee Prima Jetty in Trincomalee International assistance in the Northern Province 1 Destroyed Water Tank during the Conflict Demining Project in Jaffna Proposed Industrial Zone in Jaffna Meeting with HE Basil Rajapaksa, Minister of Economic Development Port Development in Hambantota Hambantota Port Development Plan 2 MAP 3 ABBREVIATIONS ADB Asian Development Bank BOI Board of Investment BOO Build Own Operate BOOT Build Own Operate Transfer BOT Build Own Transfer BPO Business Process Outsourcing CEA Central Environment Authority CECA Comprehensive Economic Cooperation Agreement COC Certificate of Conformity DMU Diesel Multiple Unit EC Environmental Clearance ECFA Engineering and Consulting Firms Association EDB Economic Development Board EIA Environmental Impact Assessment EPL Environmental Protection License EPZ Export Processing Zone EU European Union FDI Foreign Direct Investment FEZ Free Economic Zone FIAC Foreign Investment Advisory Committee FTA Free Trade Agreement GCEC Greater Colombo Economic Commission GDP Gross Domestic Production GII Gender Inequality Index H&M High and Medium Polluting Industries HDI Human Development Index HPI Human Poverty Index HSBC Hong Kong Shanghai Banking Corporation ICT Information and Communication Technology IDB Industrial Development Board IP Industrial Park IT Information Technology JCT Jaya Container Terminal JDI Japan Development Institute JETRO Japan External Trade Organization KKS Kankesanturai LTTE Liberation Tigers of Tamil Ealam MW Mega Watt N&E Northern and Eastern 4 ODA Official Development Assistance OSS One Stop Services PPP Private Public Partnership PUC Public Utilities Commission Q1 First Quarter Q2 Second Quarter RFP Request for Proposal RMG Rail Mounted Gantry Crane RTG Rubber Tired Gantry Crane Rs Sri Lankan Rupee SAGT South Asia Gateway Terminal SEZ Special Economic Zone SLPA Sri Lanka Port Authority TEU Twenty-foot Equivalent Units UCT Unity Container Terminal UDA Urban Development Authority UK United Kingdom UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Program UPFA United People’s Freedom Alliance US United States USD US Dollar 5 INDEX PREFACE ................................................................................................................................... 11 EXECUTIVE SUMMARY......................................................................................................... 13 1. Background and Objectives ....................................................................................................19 1.1 Background ....................................................................................................................... 19 1.2 Study Objective................................................................................................................. 19 2. Political Stability & Economic Development Trend............................................................... 19 2.1 Political Situation .............................................................................................................. 19 2.1.1 Political Developments .............................................................................................. 19 2.1.2 “Mahinda Chintana – Vision for the Future” ............................................................. 20 2.2 Economic Structure........................................................................................................... 22 2.2.1 Basic Economic Trend and Data................................................................................ 22 2.2.2 GDP Growth and Prospects........................................................................................ 24 2.2.3 External Sector ...........................................................................................................25 2.2.4 Foreign Direct Investment.......................................................................................... 27 2.2.5 Donor Financing......................................................................................................... 28 3. Challenges and Opportunities of Sri Lanka ............................................................................ 29 3.1 Challenges......................................................................................................................... 29 3.1.1 Migrating Workers ..................................................................................................... 29 3.1.2 Unemployment........................................................................................................... 30 3.1.3 Labor Regulations and Higher Wages........................................................................ 31 3.1.4 Problems of Doing Business ...................................................................................... 32 3.2 Opportunities..................................................................................................................... 32 3.2.1 Budget 2011 ...............................................................................................................32 3.2.2 Agro-Forestry in Business.......................................................................................... 33 3.2.3 Up-Skilled Garment Sector ........................................................................................ 33 3.2.4 ICT/BPO Sector ......................................................................................................... 34 3.2.5Tourism ....................................................................................................................... 35 3.2.6 Cooperation with India............................................................................................... 35 4. Industrial Park (IP) and Export Processing Zone (EPZ) Development of Sri Lanka.............. 36 4.1 BOI Regime ...................................................................................................................... 36 4.2 BOI Incentives .................................................................................................................. 37 4.3 EPZs/IPs............................................................................................................................ 38 4.4 Environment Aspect of SEZ in Sri Lanka......................................................................... 40 4.4.1 Environmental Impacts by SEZ ................................................................................. 40 6 4.4.2 Environmental Consideration for Attracting Foreign Investors and Diffusing Pollution Control Technology ............................................................................................. 40 4.4.3 Environmental Impact Assessment (EIA) in Connection with SEZ .......................... 41 4.4.4 SEZ Location in Conformity with a Land Use Plan .................................................. 42 5. Global Trends of SEZ (Special Economic Zone).................................................................... 45 5.1 Asian Experiences in SEZ................................................................................................. 45 5.2 Necessary Factors to Implement SEZ Program ................................................................ 45 5.2.1 Investment Laws ........................................................................................................ 45 5.2.2 Organization............................................................................................................... 45 5.2.3 OSS (One Stop Service)............................................................................................. 46 5.2.4 Basic Infrastructure .................................................................................................... 46 5.2.5 Services ...................................................................................................................... 46 5.2.6 Market-Oriented Skilled Workers.............................................................................. 46 5.2.7 Tax Incentives ............................................................................................................47 5.2.8 Relationship with neighboring Regions ..................................................................... 47 5.3 Assessment and Proposal of Sri Lanka’s SEZ Development ............................................ 47 6. Six Potential Areas of SEZ (Special Economic Zone) Development...................................... 48 6.1 Jaffna ................................................................................................................................. 49 6.2 Mannar .............................................................................................................................. 53 6.3 Trincomalee....................................................................................................................... 54 6.4 Kalpitiya............................................................................................................................ 56 6.5 Colombo...........................................................................................................................