SRI LANKA: LAGGING IN WORLD BANK EASE OF DOING BUSINESS

UNCLAS SECTION 01 OF 03 COLOMBO 001399 SIPDIS SIPDIS STATE FOR SCA/INS AND EEB/IFD/ODF STATE PASS USTR FOR ADINA ADLER COMMERCE FOR JONATHAN STONE MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE TREASURY FOR LESLIE HULL E.O 12958: N/A TAGS: ECON EINV EAID KMCA KCOR CE SUBJECT: SRI LANKA: LAGGING IN WORLD BANK EASE OF DOING BUSINESS AND TRANSPARENCY INT'L CORRUPTION RANKINGS ¶1. Summary: Sri Lanka rated poorly in the World Bank Group's just-released Doing Business 2008 index and in the middle of Transparency International's 2007 Corruption Perception Index. In the Ease of Doing Business index, Sri Lanka ranked 101 out of 178 economies. Notable was its ranking of 133 in enforcement of contracts -- a frequent problem experienced by U.S. firms here. In the Corruption Perception Index, Sri Lanka ranked 94 out of 180 countries. In both indexes, Sri Lanka's ranking compared to other countries declined from the previous year. The low rankings demonstrated serious impediments in Sri Lanka's domestic and foreign investment climate, and the slide from previous years suggested that Sri Lanka is not doing enough to compete globally. With all countries in South Asia except for India dropping in the World Bank rankings and all except for Pakistan dropping in the Transparency International rankings, the report also indicates that the South Asia region as a whole is lagging as countries in other regions improve their business environments and take on corruption. Ambassador continues to raise both the contract enforcement and corruption problems with the government and in public statements. End Summary. -------------- -------------- (UN)EASE OF DOING BUSINESS IN SRI LANKA, SOUTH ASIA -------------- -------------- ¶2. In the World Bank group's "Doing Business 2008" report comparing the ease of doing business domestically in 178 countries, Sri Lanka ranked 101, down from 89 in the 2007 and 2006 rankings. India rose 14 places to 120 from 134 last year. Aside from India, all other South Asian countries' 2008 rankings declined from the previous year. South Asian country rankings in the overall ease of Doing Business Index for 2005-2007 are given below. (Note: The World Bank report states that the 2008 and 2007 overall rankings are not directly comparable due to changes in methodology and inclusion of three new countries in the index.) -------------- World Bank Doing Business Index 2006-2008 (South Asian Countries) -------------- 2008 2007 2006 -------------- Maldives 60 53 49 Pakistan 76 74 66 Sri Lanka 101 89 89 Bangladesh 107 88 81 Nepal 111 100 90 India 120 134 138 -------------- ¶3. The Doing Business Index measures and compares ten indicators of domestic business regulations and their effects on businesses, especially small and medium size domestic firms. Sri Lanka ranked in the top third of countries on three indicators, in the middle third on three indicators, and in the bottom third on four indicators. The table below provides Sri Lanka's rankings (out of 178 economies) by topic: -------------- World Bank Doing Business Index 2006-2008 (Sri Lanka's Rankings by Topic) -------------- TOPIC 2008 2007 -------------- OVERALL DOING BUSINESS 101 89 Starting a business 29 47 Closing a business 39 31 Trading across borders 60 94 Protecting investors 64 62 Getting credit 97 80 Employing workers 111 112 Enforcing contracts 133 133 Registering property 134 131 Paying taxes 158 157 Dealing with licenses 160 156 COLOMBO 00001399 002 OF 003 -------------- ¶4. Sri Lanka ranked 158th in taxation, the worst in South Asia. Companies had to pay on average 64% of profit as taxes. The tax rate for South Asia averaged 41%. Sri Lanka's tax rate is also higher than the OECD average of 46.2%. Besides high taxation, companies need to make 62 different payments in order to pay taxes. (Note: The report surveyed tax liability of 100% domestically-owned companies. Most foreign investors are eligible for tax holidays -- of 3-7 years for export-oriented companies, and up to 15 years for infrastructure investors -- followed by concessionary rates thereafter.) ¶5. Sri Lanka's cumbersome legal system was reflected in low rankings in the indices covering enforcing contracts, closing a business and property registration. In enforcing contracts, Sri Lanka's rank was ¶133. According to the survey, it takes more than 3.5 years and 40 procedures to enforce a commercial contract. Further, it took 1.7 years to close a business, and creditors recovered 45 cents on the dollar from insolvent firms. It took 83 days and 8 procedures to register a property. The cost involved was 5.1% of the property value. ¶6. While Sri Lanka is one of the easiest places in the world to hire a worker, it is also one of the costliest and most difficult places to lay one off. The firing cost in Sri Lanka is about 168 weeks of wages compared with 59.2 weeks in South Asia and 25.7 in OECD. Sri Lanka also ranked low in getting credit, reflecting weaknesses in credit information systems and laws. ¶7. Sri Lanka made substantial progress in regulations and procedures related to starting a business and trading across borders. In the former it rose eighteen places to 29, and in the latter thirty-four places to 60. The introduction of a new Companies Act and electronic filing of customs declarations helped to improve these rankings. The Companies Act eliminated burdensome approvals, introduced a flat registration fee, and made company seals and notaries optional cutting down start up procedures and the time. The electronic customs declarations reduced the time for trading by seven days. -------------- -------------- SRI LANKA, REGION, COMPARATIVELY WORSE IN CORRUPTION TOO -------------- -------------- ¶8. Sri Lanka also did poorly in Transparency International's latest Corruption Perception Index, published in September 2007. Sri Lanka slipped 10 places to 94 out of 180 countries in the 2007 CPI. The CPI measures perceptions of public sector corruption. Sri Lanka scored 3.2 out of a possible 10 (10 indicating low levels of corruption). The 2007 score was a marginal improvement from 3.1 in ¶2006. ¶9. Pakistan was the only South Asian country whose international ranking rose in the Transparency International survey; the others all fell. This was despite improved or unchanged perception scores for most, again indicating that the rest of the world is improving on corruption perceptions more quickly than are the South Asian countries. -------------- AMBASSADOR RAISES CONTRACTS, CORRUPTION -------------- ¶10. Comment: These rankings track with what post has found in practice. Much of our advocacy on behalf of U.S. firms involves helping them with problems related to contract enforcement. The Ambassador regularly cites, privately to government officials and publicly, contract enforcement as a major obstacle to greater foreign investment in Sri Lanka. For example, speaking to the American Chamber of Commerce in Colombo on October 9, the Ambassador noted Sri Lanka's rankings on enforcement of contracts and starting a business and stated, "I personally have spent a great deal of time and effort attempting to help U.S. companies here resolve contract enforcement problems... I know that Minister Amunagama and the Board of Investment are eager to work with companies who are COLOMBO 00001399 003.2 OF 003 interested in investing in Sri Lanka, and I urge them to make the same kind of progress in contract enforcement as they have in business start-up rules." ¶11. Similarly, through USAID's Anti-Corruption Program and the Ambassador's private and public statements, the Embassy has drawn attention to corruption problems in Sri Lanka. The Ambassador told the October 9 AmCham audience, " Let me mention one other major hindrance to trade and investment: corruption. Corruption damages economic development and reform, impedes the ability of developing countries to attract foreign investment, hinders the growth of democratic institutions, and concentrates power in the hands of a few. A recent Sri Lankan study demonstrated that Sri Lanka's GDP would have grown by at least two percentage points in 2006 had government corruption been prevented. The best way to combat corruption is for a government, any government, to be open and transparent." BLAKE