EASTERN SRI LANKA MAKES POST-WAR ECONOMIC

UNCLAS SECTION 01 OF 04 COLOMBO 000010

SENSITIVE
SIPDIS

DEPARTMENT PLEASE PASS TO UNITED STATES AGENCY FOR
INTERNATIONAL DEVELOPMENT

E.O. 12958: N/A
TAGS: CE EAGR EAID ECON EFIN ETRD PGOV PHUM
SUBJECT: EASTERN SRI LANKA MAKES POST-WAR ECONOMIC
PROGRESS; ECONOMIC RESENTMENT LINGERS

REF: A) COLOMBO 1109 B)COLOMBO 1136


1. (SBU) Summary. The Government of Sri Lanka (GSL)
touts the 'economic success' in Eastern Sri Lanka, where the
fighting ended in 2007, as its blueprint for the
reconstruction of Northern Sri Lanka. Econoff found that the
base economy in the East of paddy rice farming and fishing
has bounced back, the GSL has improved the road network, and
the number of security checkpoints has been reduced. Two new
apparel factories have been established, albeit with heavy
subsidies, and there is tourism development potential.
However, the GSL has not been effective in overcoming other
impediments to economic development. Most strikingly, there
is local resentment that large Sinhalese companies from
Colombo are receiving the prime tourist plots and government
contracts to the exclusion of local entrepreneurs. End
Summary.

Background on the Eastern Province


2. (U) Econoff visited two of the three districts in the
Eastern Province, Batticaloa and Trincomalee. Batticaloa is
almost entirely agricultural with little or no industry. A
local business leader estimated that the Batticaloa
population is 80% Tamil and 20% Muslim with almost no
Sinhalese Buddhists. Trincomalee has paddy rice production
and fishing, but also possesses the world,s second largest
natural harbor and several industries. The population of
Trincomalee is almost evenly split between Tamils, Muslims
and Buddhists.

Basic Agricultural and Fishing Economy Bounces Back


3. (U) Agricultural rice production and the fishing
industry have quickly bounced back in both Batticaloa and
Trincomalee. The Government Agent in Batticaloa described
how paddy rice production has more than doubled since the end
of the war in 2007, increasing from 25,000 hectares in 2007
to 58,000 hectares in 2009. Moreover, the fish catch rose
from 10,000 metric tons in 2007 to 17,000 metric tons in

2009. The dramatic increases in paddy production and fish
catch were confirmed by business and NGO contacts. The
pattern is the same in Trincomalee, where paddy rice
cultivation has increased from 150,000 hectares in 2007 to
200,000 hectares in 2008 and 227,000 hectares in 2009.
Similarly, the fish catch has also increased sharply. A
government aligned academic stated that the GDP had risen 16%
in the East as abandoned land has been put back into
production.


4. (SBU) All of the local contacts, from government
officials to business leaders to NGOs, agreed that the GSL
has substantially improved the road system in the Eastern
Province. Much of the road improvements have been funded
with Tsunami resources from donors. The road system still is
not complete; the primary roads in Trincomalee were new but
the roads in Batticaloa were in worse shape. The GSL has
also improved the rural roads, but they are still below the
national roads in the East. The improved roads have brought
real benefits in terms of reduced agricultural spoilage
during transportation (40% of the crops was lost before),and
better roads for tourists. There still are problems. There
were heavy rains during econoff,s trip, and some bridges
were un-passable and some people were cut off in a remote
area.


5. (SBU) Although there are still many checkpoints, there
are fewer than before, so security checkpoints no longer
appear to be a major drag on commerce. USAID,s office on
Connecting Regional Economies (CORE) conducted a study of
logistics in the East, and found that security checkpoints
were a major impediment to trade before the end of the Tamil
Tiger war in May 2009. At that time trucks went through
multiple checkpoints where they frequently needed to unload
their cargo, taking hours at each checkpoint and sometimes
damaging the cargo. There have been dramatic improvements,
with many fewer checkpoints, and drivers are stopped only if

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they do not have proper documentation. Econoff observed many
checkpoints, but almost all cars and trucks were lazily waved
through, and usually the checkpoint was empty. Our contacts
did state that there are still some roads which are off
limits to civilians, and security around key areas, such as
the port or government officials, remains tight.

Tourism is the Sector with the Most Near Term Potential


6. (SBU) Although the East has world class beaches and
other tourist attractions, so far only domestic tourists are
visiting Eastern Sri Lankan, and long term growth will
depend on greatly improved tourist facilities. According to
the CORE study sponsored by USAID, the East Coast only has
eight 'graded' hotel establishments, with 230 beds. The
occupancy rate in these hotels was 22% in 2008, but this has
increased so much in Trincomalee (due to domestic tourism)
that it can be hard to get a room in one of the few decent
hotels there. The accommodations in Batticaloa are well
below international standards, and members of the Batticaloa
Chamber of Commerce said that travelers usually do not stop
there but stay in neighboring districts. The growth in
International tourism would be aided by a large airport, but
the Trincomalee airport only has a couple of flights per
week. Tourists must take a day long trip each way from
Colombo in order to visit.


7. (SBU) As part of the GSL,s goal to increase tourist
arrivals from 500,000 per year to 2,500,000 by 2016, the GSL
is allocating land for tourist development in Trincomalee .
Our contacts agreed that all or almost all of the prime
tourist land was being allocated by the government to Colombo
(Sinhalese) firms, and local companies were being shut out.
The Government Agent for Trincomalee (appointed by President
Rajapaksa and in charge of the area) said that he allocated
land based on factors such as capacity to develop
international hotels, financing, experience and environmental
considerations. The government agent, Major General de
Silva, added that the local companies simply do not have the
capacity to build a large international hotel. Members of
the Trincomalee Chamber of Commerce implicitly agree, by
arguing that the government needed to provide them with bank
loans and allow them to build small hotels or guest houses.
Other contacts alleged that the prime tourist land was
distributed by the GSL based on favoritism. In any case,
although Colombo firms have taken the land, they have not
begun work, but they are waiting until after the upcoming
elections season to begin investing. The CORE study projects
that if hotel construction begins in the next two years, it
will be up to five years until the hotels are open and
operational. Progress in Batticaloa is much further behind,
as the local business leaders are discussing building a
single three star hotel to house business travelers.


8. (SBU) The port of Trincomalee is the second largest
natural harbor in the world (after Rotterdam),but it has not
served as a catalyst for regional development. The
Trincomalee Port has three large companies: Prima Wheat
Mill, Indian Oil Company and Toyota Cement, and each company
has a private dock to import their industrial inputs. The
main dock is little used aside from some shipments of coal.
The port director has big plans to create a dry dock for
repairing ships and gaining some of the regional
transshipment trade. None of our other business or
government contacts foresee any major development of the
Trincomalee Port, other than an Indian-financed coal power
plant. According to a CORE study, the Port of Trincomalee
receives 4% of the Sri Lankan import cargoes, measured by
weight. Econoff met with GSL officials in Colombo, who have
great plans to expand the Port of Colombo (currently
receiving 95% of Sri Lanka,s cargo) and to build an enormous
port in President Rajapaksa,s home region of Hambantota in
the South, but few plans are underway to expand the Port of
Trincomalee.


9. (SBU) The GSL plans to expand Trincomalee,s
industrial base are having limited success. Sri Lanka is not

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keeping their present industrial base happy. The Prima Wheat
mill has plans to expand, but it has been unable to do so for
two years because they have not received the required 13
permits. Indian Oil is also frustrated that the government
prevents it from importing more oil and opening more service
stations, since the Indian Oil service stations compete with
the government gas stations. When asked about the
Trincomalee business climate, one business leader said that
he would not recommend investing in Trincomalee because there
is too much red tape and the wage costs are increasing. The
GSL established an export processing zone near Trincomalee,
but despite constructing several buildings they have been
unable to lure any companies to the EPZ. Even the successes
create problems. The GSL has an agreement to build an
Indian-financed coal plant in the Port of Trincomalee, but to
clear the necessary land the GSL has relocated 2,000 people
from their land to new government allocated land, which has
generated complaints. There are two apparel factories in the
East, Brandix and TriStar. Econoff visited Brandix,
established by a large Colombo company with the laudatory
goal of bring together workers from the Sinhalese, Tamil and
Muslim communities. The GSL has provided heavy subsidies
through a five year income tax holiday for the entire company
to the Brandix factory. USAID in a public/private
partnership is financing training for the 600 local workers
from all three ethnic communities, many of whom are war
widows, former combatants, or women from Internally Displaced
Persons camps. Brandix even requires the work teams to eat
lunch together, or else the different ethnic groups would
self segregate for lunch. The Brandix factory is not yet
profitable, however, as there has been heavy turnover of
30-40% (Muslim girls in particular quit due to family
pressure),and Brandix must work on soft work skills with
their employees, such as the importance of coming to work on
time every day. Econoff visited the factory, which was short
staffed due to a threat of poor weather, and observed a good
portion of the workers chatting rather than industriously
sewing clothes. Econoff was also told that the TriStar
factory receives heavy subsidies, although it was not clear
if these were more than the five year tax holiday..

Impediments to Increased Economic Development


10. (SBU) Land issues are a major problem in the East.
The local government has a difficult time determining land
title, since the LTTE controlled certain areas for years and
people who were forcibly evicted from their lands are coming
back and demanding their land. The Government Agent of
Batticaloa stated that land title is an enormous headache.
In urban areas the title owners may have left 20-30 years
ago, then other people have lived in the houses and improved
them, or bought and sold them. The government experiences
the same problem in Trincomalee, and there the GSL gives the
returnees new land instead of their original plots. The
situation in the country is even harder, because many paddy
farmers never had property title in the first place. The
land was left uncultivated for years due to the war, and now
the government is trying to allocate land between the current
occupants and the returnees. Several representatives of the
United Nations thought that the government was distributing
land based on favoritism and bribes, and that the land issue
has stirred up ethnic division. Land title is also required
for bank financing.


11. (SBU) Although state and private sector banks have
increased their branches in the East, local business leaders
still cannot get loans. Members of the Batticaloa and
Trincomalee Chambers of Commerce complained bitterly that
they could not receive bank loans because there were too many
paper requirements, and they lacked proper land title or
other collateral, so they turned to the informal market where
the interest rates were twice as high. A regional
representative from Hatton National Bank reported that it was
hard to find good projects for lending, and they only lend
out 45% of the money taken in through deposits.


12. (SBU) There are also several cases where water

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shortages restrict economic growth. The East has ample
rainfall three months for one paddy rice crop, but the second
crop requires irrigation. Water shortages can create
problems for industry. For example, a proposed pineapple
processing plant never materialized because the GSL could
not guarantee water supplies.


13. (SBU) Eastern farmers and fisherman are also impacted
by the lack of storage facilities and value added food
processing. Since they cannot store their rice or fish
catch, farmers and fishermen must sell immediately to Colombo
middlemen to transport the goods, reputedly at very low
prices. The East also exports raw fish, with no processing,
so there is less value added. There is progress in the
dairy sector, where, with USAID assistance, there are new
milk storage facilities so cattle farmers receive higher
returns.


14. (SBU) The GSL Board of Investment (BOI) provides 15-20
year tax holidays for investments in the North and East, but
locals have little enthusiasm for the BOI incentives.
Although large Colombo companies are receiving BOI
incentives, members of the Batticaloa Chamber of Commerce
said that locals did not know how to write proposals, they
did not have the proper collateral of capacity, so none of
them have received BOI incentives.


15. (SBU) The Tamil Diaspora could be an enormous resource
for Eastern reconstruction, but the Diaspora has not invested
yet. Our contacts gave several possible reasons, including
that they were waiting for the political situation to
stabilize, they were afraid that investment funds could be
seized by the GSL, or they did not feel safe yet.
Nevertheless, some Diaspora had visited the East, some were
interested, and locals hoped that investments would come in
the future.

Strong Ethnic Tension


16. (SBU) Our contacts saw all local issues, from
government allocation of land and contract awards, through an
ethnic prism. Several contacts worried that Tamils and
Muslims were being shoved aside in favor of Sinhalese from
Colombo or the South. The area still felt militarized, with
frequent security checkpoints, although people were waved
through. Former military leaders hold key unelected
positions and represent the federal government, such as
Eastern Province Governor Rear Admiral Wijewickrema and the
Trincomalee Government Agent Major General De Silva, (both
appointed by the GSL). Several Tamil contacts also reported
that they must register with the GSL when they travel to
Colombo, which is not required of others. In general, ethnic
identity and resentment are just below the surface in the
East.


17. (SBU) Comment. The GSL has successfully brought back
paddy rice production and fishing, but the way forward is
much harder. The GSL can pursue some ethnically neutral
development strategies such as road building, incentives for
apparel factories, and improved storage facilities. However,
the region,s best immediate bet is tourism, and the local
companies simply do not have the capacity to build
international quality hotels. The GSL could set aside some
plots for local investors, but it has not done so. The GSL
policy to award land to Colombo developers, combined with
issues of land allocation for returnees, has helped
exacerbate a tense ethnic situation. In short, the East has
recovered its basic agricultural capacity, but improvements
in the economy have not yet ameliorated ethnic tension. End
Comment.

BUTENIS