721 BOI companies closed down from 2010 to 2016

Sunday, September 03, 2017

A total of 721 Board of Investment-approved companies, including more than 100 that were granted BOI lands on lease, closed down in the seven years between 2010 and 2016. This is an average of 103 companies a year. The number of approvals granted for new BOI companies during the same period was 1,246, data obtained from the Board through a Right to Information (RTI) application showed. This is an average of 178 companies a year.

Of the companies that closed down, all had received BOI concessions such as tax exemptions while 103 had leased BOI land. In 2013, the number of entities that ceased operation even exceeded the number of approvals granted for new ones. The BOI data state that 143 companies were authorised that year while 150 closed down.

The 2015 report of the Auditor General’s Department on the BOI states that the number of defunct projects “had [sic] been gradually increased by 200 percent during the period from 2012 to 2015 due to the actions taken by the Board to close down the projects which were not implemented and held up for a long period of time without realisation of investments.”

“Number of suspended projects in the year under review had [sic] been increased by 225 percent as compared with the previous year as a result of non-compliance of projects to the BOI requirements to conduct as a BOI enterprise,” the Auditor General’s report states.

The Auditor General’s report also contains statistics. But the number of projects approved and the number of projects cancelled, suspended or closed down are different—and higher than those the BOI provided to the Sunday Times under RTI.

“Many of the reasons for these closures are internal to the companies, such as cash flow problems and market issues. In some cases, it is non-compliance with the BOI agreement, for instance, not investing the amount they were expected to,” said Dilip Samarasinghe, Director Media and Publicity, explaining the BOI’s figures.

“The companies that close are generally small and medium-sized ones,” he said. “The job losses are generally not very significant. In the apparel sector or other area of manufacturing, there are possibilities of re-hiring.”

More information is required–including details of the scale of the companies, capital outlay, export revenue generation and employment provided–to gain a holistic view of Sri Lanka’s investment landscape and why so many businesses closed down. Some may not even have taken off the ground, an analyst said, on grounds of anonymity. But the numbers do show that mere approval of projects by the BOI does not signal a healthy environment.
“There are sometimes allegations that people set up companies to get concessions,” the analyst observed. “But it’s difficult to get a complete picture without the full data. We did see a spate of projects receiving BOI status in the past, even those with relatively lower capital investments, as an incentive to generating employment and manufacturing. The minimum investment criteria were set very low.”

“To get BOI status must mean something,” he continued. “The word must be a flagship. In Sri Lanka, it didn’t mean anything, except they got concessions.” The analyst said it was important, too, to examine the data in relative terms. Some countries in the Asian region were attracting massive inflows. For instance, Vietnam received an estimated US$ 10.3 billion in foreign direct investment from just January to August this year while pledges of new FDI during that period rose an estimated 37.4 percent from a year earlier. Even Bangladesh received US$ 2.65 billion in gross FDI inflows between July 2016 and May 2017, up from the corresponding period the previous year.

A local investment partner said there could be two main reasons for the high rate of wind-ups. One is that businesses receive sanction but progress is impeded by red tape and other impediments. The other — poor screening of investors. “Some investors exploit the tax holiday and move elsewhere,” he said. “Another reason could be the shutting down of old factories.”

Last year, for instance, an Australian investor shut down his business without paying his workers for six months, leaving creditors. The venture was salvaged by another entity at a heavy cost to the BOI. Some of the companies that closed down are likely to have been affected by the withdrawal of the GSP Plus by the European Union, said Arittha Wikramanayake, the precedent partner of a law firm that also handles investment matters. With the return of the concession, they are coming back. “I also find that a lot of the new companies or existing ones seem to be spreading the risk and setting up overseas, as well,” he said.

Meanwhile, Sri Lanka needed to improve in crucial areas to attract–and keep–investment. “For instance, trademarks take four years to get and are not recognised overseas,” Dr Wikramanayake said. “We are not members of the Madrid Agreement (Concerning the International Registration of Marks). The patents we issue are not recognised elsewhere. There are no international payment gateways. And now there are no tax incentives.”

Other issues inhibiting investors included high energy costs, long process of approvals, labour costs and anachronistic labour laws.