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Meeting Post-Conflict Challenges

World Cement,

Consolidation of power

As if Sri Lanka had not experienced enough turbulence over the past 30 years, there was another twist in the country’s fortunes last month when its constitution was amended for the 18th time since 1978. The amendment ensures that President Mahinda Rajapaksa has the power to serve more than two six-year terms, has final authority over all appointments to the civil service, the judiciary and the police, and to cap it all, he is also commander-in-chief of the armed forces. The country’s liberals are outraged, claiming such a move to autocracy could damage prospects for foreign investment. Analysts and experts, however, are divided. Some say that the amendment is extremely retrogressive, particularly from the point of view of checks and balances that will have a bearing on governance and the rights of the minorities, especially those of the Tamil people. Others say that it is a good thing from an economic and market perspective because it means that if the president is re-elected, there will not be any changes in policy for a long time. This could prove helpful if investors appear comfortable with what he is doing. In fact, he has just announced an investment of US$4 billion to help rebuild the war-torn north, loans for self employment and housing the poor in the troubled former war zones areas. There is a joint agreement with India to build 50 000 houses for the internally displaced people in the north this in itself will bring much needed local employment.

Cement demand this year could increase by 6 – 7 %, clearly driven by reconstruction demands.

East vs Wes

The Asia Times reports that something of a trade battle is emerging with the European Union, following the EU’s decision to suspend trade preferences for Sri Lankan exports. Sri Lanka is refusing to accept any of the EU’s recommendations on the country’s controversial human rights record during the war, and remains adamant about its position against the EU’s proposed measures. On 21 September, Professor Rajiva Wijesinha, a high profile Sri Lankan backbench MP, speaking at the Royal Commonwealth Society in London, announced that a new human rights action plan will soon be officially adopted by his country. He spoke of the steps being taken by his government to normalise the situation for the inhabitants of the land previously under Tamil Tiger control.  Some quarter of a million displaced people are now being resettled, most of them back in the areas from whence they had fled. He was optimistic about infrastructure development and investment. The Sri Lankan government maintains that the threat posed by the Tamil Tigers still exists and that a state of emergency will continue.

This does not seem to be deterring some investors. On 27 September, the Sri Lanka Broadcasting Corporation reported that President Rajapaksa, while attending the 65th session of the United Nations General Assembly in New York, had met with a group of US investors who had expressed willingness to invest in Sri Lanka. He also held bilateral discussions with various leaders of friendly nations to apprise them of the post-conflict development and the peace situation. Of particular note was the meeting with president Abdullah Gul of Turkey, who said that his country would be prepared to invest in Sri Lanka’s construction industry. There were similar positive meetings with the Emir of Qatar, Sheikh Hamad bin Khalifa Al-Thani and the Jamaican prime minister, Bruce Golding, who discussed the development of tourism in Sri Lanka.

Good for cement

Government figures issued last month indicate that cement production increased by 23.5% in the second quarter of this year compared with an 8.7% decline in the same period in 2009. Cement demand this year could increase by 6 – 7 %, clearly driven by reconstruction demands. Holcim Lanka is the island’s only integrated cement manufacturer, while Tokyo Cement operates grinding, bagging and import facilities. Indian cement producers sensing the demands created by the infrastructure programme are knocking on the door. In March 2010, sources in the Indian press suggested that Madras Cements had already begun shipping cement to Sri Lanka, while India Cements and Dalmia Cement had received approvals from the island’s quality certification body to ship in cement. Competition comes from India’s UltraTech, which operates a modern joint venture cement terminal in Colombo. One can foresee that, as the island expands the reconstruction programme, the Indian cement majors will increase their efforts to win export contracts, and who knows, one of them might just consider building a new plant on the island!

The Sri Lankan business press reports that the Indian Development Finance Company, a top Indian infrastructure finance player, has submitted a proposal for the island’s government to consider setting up a fund to support the reconstruction programme, further indication that Sri Lankan companies lack funding to support construction projects and are seeking finance overseas.

Chinese and Indian support: who’s winning?

It was particularly significant on 15 August 2010, the day the EU ended Sri Lanka’s trade benefits, that President Rajapaksa ceremonially released water into a newly built Chinese-funded harbour at the southern coastal city of Hambantota. The port was built at a cost of US$360 million, about 85% of which came from China. Therein lies the dichotomy. While the EU and the US call upon Sri Lanka to address human rights issues, China is urging more international support. However it is itself involved in another major project: the Colombo South Container terminal. The Sri Lanka Ports Authority (SLPA) has signed a letter of intent with China Merchant International Holding and Aitken Spence Consortium to construct the US$450 million project that is scheduled for completion before 2012. China is lending US$200 million to build a second international airport in the south of the country, close by the new harbour at Hambantota.

Two months ago, Sri Lanka sealed an US$83 million agreement with India to reconstruct a section of the northern railway that was destroyed during the war. This is in addition to a similar agreement between the two countries to rehabilitate another section of the same railway line worth over US$ 140 million. Tourists to Sri Lanka will tell you that railways are essential in the country as travelling by road can be tortuous and extremely time consuming, so last month’s announcement that a leading Malaysian company is planning to invest US$100 million on a high speed railway from Colpetty to the Katunayake airport would be good news for the government, as well as for the predicted influx of tourists and visitors in the coming years.

China is also involved in many other projects and there is a fear that it is attempting to undermine India’s influence in the region. It would be surprising if India’s long standing traditional links with Sri Lanka would allow this to happen, but the former colonial days are long gone; it’s now a different era, and very different world

Massive potential

It could be argued that these projects are only beginning to scratch the surface of Sri Lanka’s need to alleviate poverty and restore those areas ravaged by decades of conflict. Inevitably, there is still a degree of caution on the part of countries and the big conglomerates to move from simply being interested, to taking action and making commitments. But, as well as those countries mentioned earlier who are prepared to invest and take risks, Australia’s High Commissioner in Sri Lanka, Kathy Klugman, recently said that with the end of the war and the global economic downturn, Sri Lanka is now in a favourable situation for international business, and the confidence of Australian investors towards the country is increasing. She indicated that the Australian High Commission is keen to build trade and investment relationship between her country and Sri Lanka.

What will have pleased the Sri Lankan government was the news that the World Economic Forum recently stated that the country had jumped up 17 places in the global competitiveness rankings and is now placed at 62 as against its previous ranking of 79, and is poised to be within the top 50 countries of the world. Further encouragement will have come from Standard & Poor’s Ratings Services, which has raised Sri Lanka’s foreign currency rating to B+ from B. The rating upgrade takes into account that the continued strengthening of the country’s government-planned revenue reforms will improve public finance, such as fiscal debts, with a decline in public debt.

All this is best summed up by a member of the recent IMF mission to Sri Lanka who   said, “Overall economic conditions are improving and the economy is likely to show strong growth this year. External balances are strong, remittance inflows continue at a high rate, tourism prospects continue to improve rapidly, and gross reserves remain at comfortable levels”.

The Teardrop island looks to be facing up to its challenges.

By Paul Maxwell-Cook.

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