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Cablegate: Sri Lanka: Lagging in World Bank Ease of Doing Business

VZCZCXRO5316
RR RUEHLMC
DE RUEHLM #1399/01 2830914
ZNR UUUUU ZZH
R 100914Z OCT 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6954
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1446
RUEHKA/AMEMBASSY DHAKA 0454
RUEHIL/AMEMBASSY ISLAMABAD 7441
RUEHKT/AMEMBASSY KATHMANDU 5584
RUEHCG/AMCONSUL CHENNAI 8038
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

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

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