Sri Lanka defends controversial land deal; tax breaks to businessman
ECONOMYNEXT – Sri Lanka’s Development Strategies Ministry had defended a land deal and an extended tax holiday to a controversial investor, saying such deals have taken place in the past and the land was ‘undulating’.
RIGID Tyres, is a project promoted by Nandana Lokuvithana, who runs a steel plant in the country protected by import duties, pushing up building costs of homeless Sri Lankans and creating a near monopoly.
The ministry in a statement said land is given on a 99-year lease on an upfront fee of 170 million which "the investor has agreed to pay." It works out of 10,650 rupees a perch.
The annual lease rental will 100 rupees an acre of 8.3 rupees a month per acre according to the statement.
The Ministry of Development Strategies defended the move saying such deals have also been done in the past.
The property was given at this price, based on a value provided by the government chief value because the land was "undulating".
Lokuvithana was a close associate of ex-President Mahinda Rajapaksa, during whose tenure he bought the factory with import duty protection. There have been unproven charges that he managed funds of the ex-President.
"When proposals for investments are received we do not look at the political affiliations of the investor and projects are evaluated and approved on the basis of economic and social benefits to the country," the Development Strategies Ministry said.
After getting the benefits, the firm will pay not tax to the government for 12-years, according to reports.
Sri Lanka’s low government revenues had been blamed on ad hoc extended tax holidays given to various businesses. The current administration had slapped a 15 percent value added tax on healthcare to raise revenue.
But "approval was granted by the Cabinet on granting the tax concessions prevailing at the time of the application," the statement said.
The firm will produce solid tyres and radial tyres. According to early reports the firm was planning to sell 25 percent of the output domestically, but later reports said it would be 40 percent.
Like steel, tires are import duty protected allowing over-pricing, and there is only one large automotive tyre producer in the country.
The statement made no mention of domestic sales.
"It is worth to mention that in different countries promoting investment projects, various mechanisms exist for lease of land and providing infrastructure on case by case basis, based on evaluation of salient features of the project, level of infrastructure required, extent of land, etc. In India, in certain states land is given for one Indian Rupee per Acre per year to attract investors," it said.
Anti-corruption activists have pointed out that the greater the discretion given to state officials and politicians the greater the room for corruption.
To reduce corruption ‘rules of the game’ have to clear and transparent, which will reduce discretion and monopoly powers have to be cut with competition.
Robert Robert Klitgaard, a researcher systems has devised a formula for corrupt systems: C = M + D – A or Corruption equals Monopoly plus Discretion minus Accountability.
Sri Lanka had slipped 12 places in a corruption perception index for 2016, compiled by Transparency International.
The ministry said a statement by Minister Rajitha Senaratne, that Prime Minister Ranil Wickremesinghe was unaware about the identity of the investor, was not correct.
The full release is reproduced below:
The statement of the Minister of Development Strategies & International Trade on the Project to Manufacture Radial and Solid Tyres at Wagawaththa, Horana
It is noted that there have been articles published on Horana Tyre Factory Project at Wagawaththa Industrial Zone, giving misleading information to the public. The statement made by Hon. Rajitha Senarthne on this issue is also incorrect.
It is necessary to emphasize the fact that, both His Excellency the President and the Hon. Prime Minister were aware of the investor since I, myself informed them well in advance.
Furthermore, two cabinet papers ie. initially one proposing the land and then giving details of the incentives and other terms were submitted on this project and in addition the project was discussed and endorsed at several meeting of Cabinet Committee on Economic Management.
The statement that the land was given for Rs.100/- per Acre is incorrect. In fact, the Government Chief Valuer had valued the land at Rs. 170,825,000/- and the investor has agreed to pay the total amount upfront. The Chief Valuer has also indicated that a further Rs. 10,000/- be charged as an annual nominal fee. Further details pertaining to the project are given below.
The 100 acre land at Horana, Wagawaththa Industrial Zone is a bare undeveloped land undulating in most areas. Based on the technical investigations done by Central Engineering and Consultancy Bureau (CECB), it is noted that the investor has to incur a sum of about Rs.300 to 400 Mn as per the estimate to bring the land to a usable state. The investor claims that around 3m layer of weak soil has to be removed throughout 25 acres of this land.
BOI is not providing any infrastructure facilities like in other zones- e.g. even the waste Disposal Treatment Plant will be constructed by this investor. Similarly, all internal roads will have to be constructed by the investor.
Based on valuation of land by Government Chief Valuer – an upfront payment of Rs. 170Mn is to be paid by investor. Since the project requires a large extent of land, the investor requested the land be leased to him based on the valuation determined by the Chief Valuer on the basis that infrastructure will be provided by him. The said request by the investor was accommodated by us in view of the high value of the investment of the project and the significant contribution expected to the economy particularly linked with the rubber industry.
BOI should promote investment and if necessary regulations & rules need to be changed to attract investments as the current regulations have failed to bring in investors. The FDI in 2015 was USD 970 Mn and in 2016 it will be around USD 450 Mn. which is extremely low by any standard.
The total investment of this project is USD 75Mn (Rs 11.25 Bn). The Project will employ around 3000 people. It will add value to the rubber produced in Sri Lanka & convert raw rubber to radial and solid tyres. The annual export earnings will be above USD 125Mn.
There will also be inward transfer of technology as the Italian company Marangoni is expected to provide the technical know-how to produce tyres and other rubber based products.
There are similar BOI projects, on BOI owned properties, which have been given on long term lease with an upfront payment & an annual fee is not charged from such projects – e.g MAS Group given 47 acres on 50 year lease and upfront payment is to be received and no annual fee is charged. This was a well-developed property with buildings and other infrastructure, although major repairs/renovations will have to be undertaken by the investor (former Kabool Lace property). Furthermore, a land vested by BOI in Kuliyapitiya was given on a freehold basis to Western Automobile Assembly for a proposed Vehicle Assembly Plant. The BOI has also granted 357 acres in the same area on a 99 year lease for 1 USD per acre per annum to Merbok, in settlement of a dispute arising from a contract signed in year 2000.
All expenses in developing this land, including constructing a treatment plant, internal roadways & obtaining transformers, etc will be on account of the investor. Therefore, this project should be considered on the same basis as the MAS project.
This investor applied to set up the plant in March 2016 when they were eligible for the tax concessions under BOI.
Initially, BOI took steps to acquire a private land in Horana but since the owners of that land were unwilling to sell this property BOI was instructed not to acquire that land as per this President’s observation on Cabinet Paper no MODSIT/3/CAB/16/8 dated 2016.06.02
We believe the investor should not be penalized for this delay on the part of BOI to make available the land. Accordingly a Cabinet Memorandum was submitted on 2016.10.03 identifying the BOI owned land at Wagawaththa and explaining this position. Accordingly approval was granted by the Cabinet on granting the tax concessions prevailing at the time of the application.
It is worth to mention that in different countries promoting investment projects, various mechanisms exist for lease of land and providing infrastructure on case by case basis, based on evaluation of salient features of the project, level of infrastructure required, extent of land, etc. In India, in certain states land is given for one Indian Rupee per Acre per year to attract investors.
When proposals for investments are received we do not look at the political affiliations of the investor and projects are evaluated and approved on the basis of economic and social benefits to the country. (Colombo – Corrected- monthly and annual rentral)