4. Policy Implications and Recommendations
Sri Lanka and China have enjoyed close diplomatic relations for decades, which have evolved into an economic relationship in the infrastructure sphere. Chinese infrastructure investment in Sri Lanka began before the BRI was launched in 2013 and has continued in recent years. The evidence-based study undertaken for this paper pointed to various national benefits and costs from the overall pattern of Chinese infrastructure investment in Sri Lanka, between 2006 and 2019, in the areas of economics, labour, environment and institutions. The study also showed that projects differ in their cost-benefit calculus with some projects generating larger net benefits than others. The new administration of President Gotabaya Rajapaksa, formed in late 2019, has set out a national policy framework with some emphasis on an infrastructure-led growth model of economic development for Sri Lanka to reach high-income status. It is clear that existing projects with Chinese participation will remain prominent and new Chinese investments are under discussion.
Accordingly, the crucial development challenge for Sri Lanka is how best to ensure net benefits across the project portfolio of Chinese infrastructure investments. Meanwhile, China’s challenge is how to further its reputation as a responsible global economic partner. It is useful to explore policy implications to achieve both outcomes.
Improving debt management
The research for this paper has confirmed previous findings that Sri Lanka may have a general foreign debt problem, but not a Chinese debt problem per se. Nonetheless, it would be prudent to reduce the risk of Sri Lanka falling into a Chinese debt trap in the future. An initial step would be for Sri Lanka to appoint a committee of independent experts to study the treasury and debt implications of projects with Chinese participation. In addition, the country could strengthen its debt management system to reduce debt-related vulnerabilities and improve debt transparency (particularly in infrastructure projects) with technical assistance from the International Monetary Fund (IMF) and the World Bank. Sri Lanka might also request a moratorium on interest payments of Chinese debt for three years to facilitate overall debt sustainability. Over time, Sri Lanka could also look to increase its share of infrastructure financing from the AIIB, which offers relatively low-cost infrastructure financing at high procurement and environmental standards. The AIIB started lending to Sri Lanka in 2019 and has only approved two projects to date. With a relatively low cost and high reputational impact, China can provide resources for IMF and World Bank technical assistance in Sri Lanka and encourage the AIIB to upscale its activities in the coming years.
Reducing the trade deficit
The increase in Chinese infrastructure projects is associated with rising Chinese imports and the poor performance of Sri Lankan exports to China. Sri Lanka’s growing trade deficit with China could potentially be offset by FDI from China. However, to date, Sri Lanka has only seen a trickle of export-oriented FDI from China. Sri Lankan firms have difficulty exporting to China due to tariffs, non-tariff measures, poor market information and the Chinese language. A much more concerted effort is required to market Sri Lanka in China as an investment and export destination and to improve its domestic FDI regime. To achieve this, Sri Lanka could establish a combined and well-resourced investment and export promotion office in a major business hub like Shenzhen, staffed by marketing professionals with business expertise and Chinese-language skills. This could be set up as a pilot project and replicated in other business hubs in China if successful. Another method of promoting Sri Lanka is to revamp the country’s unattractive FDI regime by introducing selective tax incentives for strategic investment projects, streamlining business regulations facing investors, and ensuring a predictable macroeconomic environment.
Promoting domestic spillovers
To date, Sri Lanka has had limited indirect spillovers from Chinese projects such as sectoral shifts, exports and employment. This is a complex economic issue, but investment in and support of the industrial zone adjacent to the Hambantota port may improve the situation. In the wake of rising wages in China and an economic slowdown, international and Chinese investors are looking to relocate manufacturing activities to other parts of Asia, such as Sri Lanka. China can facilitate outward FDI to Sri Lanka by providing incentives for Chinese SOEs to relocate to the Hambantota industrial zone and to undertake supplier development programmes that foster linkages with local small and medium-sized enterprises (SMEs) and create local jobs. As mentioned above, Sri Lanka needs to improve its marketing efforts in China and its FDI regime.
Enhancing skill transfers
There is little evidence to support the view that Chinese projects are mostly staffed by Chinese workers or that illegal Chinese migrant workers are a major problem in Sri Lanka. Instead, relatively small inflows of unskilled, skilled and professional manpower have mitigated domestic labour shortages in the construction industry and resulted in some skill transfer from abroad. Sri Lanka could introduce legislation to incentivize firms that employ foreign workers to increase training of local workers and formally report their efforts.
To attract more high-skilled labour with the potential to add greater value, Sri Lanka should introduce an efficient online visa system that facilitates online submission of documents (including skill transfer plans) and scheduling of convenient appointments. To reduce the risk of illegal unskilled migration, a guest worker scheme should be introduced for temporary workers, based on labour market demand. The National Human Resources Development Council should be mandated with a manpower planning function that matches economy-wide labour demand with potential labour supply. Closer coordination with the Immigration Department and other agencies will help enforcement and in creating a database on migrant workers, who should also be protected against any discrimination. To control outflows of illegal emigrants and combat people smuggling by organized crime syndicates, China recently established a National Immigration Administration under the Ministry of Public Security.
Strengthening environmental protection
Chinese investment projects in Sri Lanka have had a mixed impact on the local environment. While newer projects like the CICT terminal have minimal environmental impact due to adherence to standards, older projects like the Norocholai power station have been more harmful to the environment. In future, Sri Lanka should improve domestic environmental standards and enforcement for infrastructure projects. These standards should mirror international standards and encourage working with innovative partners in green technology and green financing systems. The goal should be to attract projects and investors that prioritize environmental protections in their investment. The planning and design stage of infrastructure projects should also consider the SDGs. Sri Lanka could introduce incentives for projects that meet a minimum requirement of green, innovative or energy-saving technology that are implemented in the country. The EIA process could benefit from enhanced transparency and local stakeholder consultation.
Improving infrastructure planning
There are several prominent concerns about the implications of Chinese investment for institutions in Sri Lanka, including the need for empirically sound planning of national infrastructure projects, and concerns about national security in regard to port development projects. Research for this paper found some fears to be overstated, due to the geopolitical tensions between a rising China and its competitors, which incentivize critical narratives of Chinese investment. Nevertheless, Sri Lanka should look to end its inefficient and potentially costly practice of devising broad infrastructure plans in each electoral cycle and adopt the practice, followed by more successful economies, of devising detailed infrastructure development plans that span 20 years or more, which are data-driven, including in regard to demographic trends, environmental factors, technological development and international partnerships. FDI approvals should be digitized in a user-friendly way and streamlined under a single approvals body that considers national security implications of investment projects.
Ensuring public trust
There is a need for public trust in infrastructure development projects funded by China and processes to ensure this is achieved, namely transparency, stakeholder engagement and anti-corruption measures. Remedies include amendments to the RTI Act to remove or limit exceptions related to public disclosure, and holding regular media briefings to disseminate accurate information about Chinese projects. Other recommended steps include requiring relevant ministries to undertake stakeholder consultations on large infrastructure projects. Sri Lanka should also consider prohibiting foreign political donations, a move that could potentially be complemented by greater oversight of outbound investment projects by China’s Central Commission for Discipline Inspection.
The Sri Lankan experience of Chinese infrastructure investment offers useful lessons for other countries that are turning to China for investment, particularly in the developing world. But as countries differ in their institutional and policy conditions, insights from the Sri Lankan experience should be considered in the context of individual national circumstances.