Thursday, June 13, 2013

Things to consider when starting a small / medium business in Sri Lanka

Once a friend of mine teased that "you should never encourage a foreign investor to invest in Sri Lanka". Well if you exclude the legal and political frame work, there are many benefits of investing in Sri Lanka. I've worked with investors from all continents except Africa. I can assure that compared to many countries, Sri Lanka is not as bad as they say. I have to agree its not easy to practically operate smoothly. But there are many benefits. In this article I'm trying to give a summarized picture of both sides, the risks and the benefits of starting a business in or with Sri Lanka and more in to how to over come some of the difficulties.
 
 
(picture credit - http://mysrilankaholidays.com)
 

 

 Benefits of investing / starting a business in Sri Lanka

 
1. Less cost of operation compared to many countries
 
In Sri Lanka you can buy raw materials and other goods and services at a very reasonable price compared to many countries. With the lands good for cultivation and rich with many natural resources, it offers unmatched advantage. Except oil, all other necessities can be home grown.

Cost of using the power / telecommunication and building space is bearable. Except for power, all other services are supplied by competitive market providers, makes it not unfairly expensive to bear for a business.

You do get value for money in terms of skilled labour.
 
 
2. Quality and educated labour force
 
From a country with a literacy rate of 90%, you can expect a lot. This is way above the rest of the countries in South Asia.

If you are looking for laborers for low level occupations such as sanitary field, then certainly there are low cost work force in some countries around Sri Lanka. But if its for a work to do with intelligence, the level of IQ with Sri Lankan work force is very high.

Almost everyone who had secondary education can speak and write English.

Gender equality is respected in jobs. More men involved in hard physical jobs such as military. But more or equal number of women are involved in medical / accounting / banking / teaching etc work.

People do not mind working bit more extra time and complete the work than working to the clock. Time is not money in many scenarios. There are out sourcing centers of global companies where people work all 24 hours through shift basis.
 
3. Living standards are high in terms of many things
 
Sri Lanka is a country where you can come and live happily. You can have the best food in the world , can rent out a beautiful apartment near a river, go to work in the day time and go for a swim or any other sport in the evening and all these at a quite reasonable price you will never imagine.

I know many European customers who came to Sri Lankan branch offices to work for short periods such as one year or two years, but then requested to stay and continue to work from the office in Sri Lanka. I can guarantee one thing. You will never feel alone or left out in Sri Lanka. People love hospitality and enjoy company.

Refer below link to see what Sri Lanka has to offer to you.

http://www.investsrilanka.com/why_invest_in_sri_lanka/quality_of_life.html

There is no war in the country. Central government impose laws. You don't find different laws in different cities when it comes to major laws.
 
4. No insane taxation laws

Yes Sri Lanka is not a tax heaven. You do have to pay your taxes like responsible residents. But there are no insane tax laws like they have in some  European countries. Most of the taxes are added to the commodities and therefore the income tax is lower. There are no such system that they pay social security benefits for the people who don't work at the expense of the hard working people's tax. Therefore everyone has to work hard and earn if you want to get your bread.
 
If a company is started under the guide lines of Board of Investment of Sri Lanka, you get special tax holidays and other tax benefits.

There are double taxation treaties with 38 countries which prevents you paying double taxes. Please refer below link for the list.


5. Supportive Laws / policies and Institutions

1. Sri Lanka has an open economy.
 
2. Only very few products are restricted to import / export.
 
3. Total foreign ownership is permitted
 
4. No restrictions on repatriation of earnings, fees, capital, and on forex transactions relating to current account payments. (source - BOI)

 5. There is a Board of Investment to support the investors through out the business.

6. There are expert private companies to provide types of business openings with BOO (Build, Operate and Own) and BOT (Build, Operate and Transfer).

7. Its easy to start up a company and easy to wind up too.

8. Special  promoting laws for businesses in free trade zones.


6. Location of the country makes it a logistics trade hub

Sri Lanka is strategically located in the sea way to the entry of south Asia and connecting both east and the west.

Country has easy access to all routes and perfect for import / export businesses. Both the Colombo port and the air port provides variety of services and operates smoothly.




(picture credit - BOI - link below)
 
Please refer to below link for more details.
 
 
 
7. High standards of health

There are doctors working and hospitals (both government and private) open through out the year all 24 hours. Medical facilities are provided free of charge by government hospitals. No GP system. All doctors are accessible. Meeting a doctor is just a matter of making an online booking or driving to a hospital.

It is very difficult to be a doctor in Sri Lanka due to the toughness of the exams and practical training you have to go through. Only the students who get the maximum results from GCE A/Ls get the opportunity to go to medical colleges and only the government can run medical colleges. All in all doctors in Sri Lanka have a super capability of diagnosis and who work beyond their times for the benefit of patients.

Thanks for having a powerful medical sector, country has eradicated many diseases. You do not have to be scared for getting your body organs removed without your knowledge when goes for a surgery like it happens in some countries.

If you are coming with children, you might want to check out the immunization system. Please refer to the below link.


 

Risks / difficulties / disadvantages  or down side of starting a business in Sri Lanka


I certainly love my country and do not want to bitch about it. But after meeting many disappointed investors I feel its good if they know about the real situation. Then they can do a risk benefit analysis before they start up. Same as people can take preventive steps if they know what they actually have to deal with. 

1. Slow operation of law and order

Well I'm not happy to write much about it. But I would say just get your work done and mind your own business. Don't get in to trouble with people. If you are a girl, don't go out in the night alone. At the moment I'm writing this, a senior DIG of police is questioned for killing a businessman on a contract given by his business partner.

Better to read travel advice to have a basic idea.


2. Cannot get any work done without giving a bribe

Sadly, at the moment even a district judge is charged with taking bribe. I would say, never offer a bribe. Never accept a bribe. But make sure you never fall in to a situation you are a victim and then you have no choice other than paying a thumping amount of bribe.

Someone told me that he will always go to a counter where there is a girl, because girls won't take bribe. But recently one of my relatives told me that a young girl from "the most efficient" department in Sri Lanka asked a Rs 200,000 bribe from him to finalize some papers which is anyway her job to do. He has found out that only 6 months before this girl has started working. You can just imagine about others.

How to save your self from bribery? If you have not yet started the company in Sri Lanka, then better give the initial operational work to a reputed legal or consultancy firm in Sri Lanka. There are international affiliated firms in Sri Lanka such as KPMG / Ernst &Young / HSBC Out sourcing unit /etc which would engage in such work. If you have already started your company, then better to recruit some experienced staff to do local work, so they may know how to deal with some offices / officers by experience.

If you decide to do things on your own,

1. Just know everything perfectly before you go to a place. For example if you are going to Inland revenue department, study the taxation law, calculate your global tax liability, have your facts clear, have your files clean  and then go.

2. Go way before the date you need it. For anything to get done early or on time, you will have to pay more even if its their job to do it on time.

3. You will have to go to several places to get a work done and you will be directed to so many people saying he is supposed to do that work. Know this and go. Then you will not be disappointed.
 

3. No written information or procedures for many things

Constitution and other bills has the main laws. Some regulations are documented in Board of Investment web site (http://www.investsrilanka.com/). But these information are also not very detailed and does not include each and every step. This is very high level information compared to the amount of information you practically required to operate.

Its very hard to find laws / regulations / procedures in writing. Even the relevant offices don't know much out of their scope. Therefore most of them uses their wish to interpret things which should have had a common rule. This again leads to many mal practices. For example once the post master at a certain post office, obtained a large amount of money (amount almost equivalent to the price of the book) to release a book received to his name by post. He even issued a receipt stating its government tax imposed on books comes by post. But actually later my uncle found that there's no such tax imposed by government and it was too late by the time he realized that he is cheated.

This is same both in public and private sector. Managers of two branches of the same bank may tell you two different requirements to get a certain work done.

4. Morally questioning projects are promoted even by authorities

For example there are some investment proposals inviting investors to start hotels inside a wild life sanctuary or inside a natural rain forest. It does question the impact to the bio dynamic surroundings of such forests caused by such construction. Some things in nature need to be kept untouched.

You may not know the story behind the business proposal you get. But if you are a concerned and valued person, better check the back ground and use bit of common sense.

5. Laws can be changed any time
 
It is often mentioned that by law it is providing safety against nationalization of private companies.  
 
But On November 2011, the Parliament of Sri Lanka passed legislation that will permit the government of the country to expropriate 37 businesses that are currently performing poorly. These are businesses that had been privatized previously.

(source - http://www.loc.gov/lawweb/servlet/lloc_news?disp3_l205402879_text)

There were legal cases against privatization of couple of big businesses in the country following the change of the political leadership.

Therefore you need to be alert if you are planning on buying any previously state owned companies or properties.

6. Ownership of lands are not very clear

Recently I saw a news where an investor who came and purchased a land has suicide him self. Because the land he purchased was apparently a cemetery and he did not know. He has got cheated. There are several forged deeds in make inside the country.

If you are buying  a land, make sure you get it done through a reputed legal firm. Then will go to land registry and cross check the owner's deeds with the original deeds and confirm whether its a genuine document.
 

Risk benefit analysis

 
If you know how to manage things, then definitely the benefits overruns the risks. Its hard to find a place where you can find so many advantages collectively in one place. Many investors came to Sri Lanka even when there was a war, even when the bombs were blasting in the capital city. Therefore no argument about the benefits of investing when it is now much peaceful.
 
Country is politically very stabilized. Talk on the streets shows that it will remain as it is for some more years to come. Infrastructure is developing at a very high speed. Market managed to survive couple of recessions. Local people never say its not good to start a business. As long as citizens believe its good to start a business in the country, it is a good place to invest.
 
I already see many Indian and Chinese investors in the country.  I sincerely hope that many more will follow.
 
References for more details

If you need more details, I came across following sites which has lot more details. You can refer to those as well.



3 comments:

Anonymous said...

Until Sri Lanka decides to become open and transparent in all business and legal dealings people will not invest.
Many foreign investors have tried and failed, they have left empty handed, everything they built now in the hands of a scammer, in most cases the scammer is their "friendly" sri lankan business partner who sat back let the foreigner build the business and then when it was successful kicked out the foreigner knowing there were no laws to protect the foreigner.

VTazdecor said...

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Sankar lp said...

Great Article
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