Cablegate: Sri Lanka: Commerce a/S Lash Pushes Investment

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 COLOMBO 002346

SIPDIS

DEPT PASS USTR

E.O. 12958: N/A
TAGS: ETRD ECON EINV CE USTR CWC
SUBJECT: SRI LANKA: COMMERCE A/S LASH PUSHES INVESTMENT
CLIMATE ISSUES

1. Summary: Following up on President Bush's July commitment
to Prime Minister Wickremesinghe to examine areas for greater
economic engagement with Sri Lanka, William H. Lash III,
Assistant Secretary of Commerce for Market Access and
Compliance, brought a Commerce Department delegation to Sri
Lanka December 19-20 to assess areas for economic and
commercial engagement with the Government of Sri Lanka (GSL).
A/S Lash used his visit to press GSL to improve the investment
climate and to approve several pending proposals by U.S.
companies. He delivered these messages during separate
meetings with Minister of Commerce and Consumer Affairs Ravi
Karunanayake, Minister of Finance K.N. Choksy and Board of
Investment Chairman Arjunna Mahendran. A/S Lash also engaged
leading business representatives to hear their concerns on Sri
Lanka's investment climate. A press conference by A/S Lash led
to widespread coverage of the visit. The visit succeeded in
focusing the GSL on steps it needs to take to strengthen its
trade and commercial ties with the U.S. End Summary.

2. William H. Lash III, Assistant Secretary of Commerce for
Market Access and Compliance, brought a Commerce Department
delegation to Sri Lanka December 19-20 to assess areas for
economic and commercial engagement with the Government of Sri
Lanka. The Commerce Department delegation consisted of A/S
Lash; J.V. Schwan, Counselor to A/S Lash; Linda Droker,
Director for South Asia and Oceania; and Art Stern, India/Sri
Lanka Desk Officer.

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Meeting with Minister of Commerce
---------------------------------

3. A/S Lash met on December 20 with Minister of Commerce and
Consumer Affairs Ravi Karunanayake. A/S Lash began by
explaining that his visit was a direct outcome of the
President's commitment to Prime Minister Wickremesinghe, made
during their July meeting at the White House, to examine areas
for greater economic engagement with Sri Lanka. The U.S. is
following closely Sri Lanka's economic reforms, he said. Sri
Lanka had already pulled ahead of the rest of South Asia in
terms of openness and average standard of living, in spite of
years of conflict. Now, with the prospects for peace stronger
than ever, the best way for Sri Lanka to attract foreign
investment, and thereby raise average income levels, is to
improve further its investment climate.

4. A/S Lash went on to exhort Sri Lanka to become an example
within South Asia of sound IPR protection. Effective IPR
protection, he said, was a key factor for U.S. companies when
evaluating countries for potential investment. With many U.S.
firms considering technology and patents their greatest assets,
domestic protection of this property will be critical to Sri
Lanka attracting investments in knowledge-based industries such
as IT. Karunanayake said that GSL has prepared TRIPS-compliant
IPR legislation that it expects to enact soon; the legislation
is currently before the Cabinet and will be debated in
Parliament in early February. A/S Lash replied that
legislation was a good and necessary first step, but that
enforcement of IPR was equally important. Many countries have
solid IPR legislation on the books, but fail in enforcing it;
Sri Lanka should set the regional standard for IPR not just in
word but in deed as well. Karunanayake professed to understand
the need for enforcement, and asked for U.S. help in training
customs officials, police and judges; A/S Lash undertook to
examine areas for possible U.S. assistance.

5. A/S Lash asked Karunanayake about the status of GSL's import
regulations on biotech foods. While the U.S. was gratified
that Sri Lanka indefinitely delayed its proposed ban on biotech
food last year, we want to ensure that the Sri Lankan market
remain open to biotech foods. Karunanayake assured A/S Lash
that the biotech ban would not return. A/S Lash cautioned GSL
against adopting any mandatory labeling scheme for biotech
foods, pointing out that the U.S. objects strongly to any
requirement that manufacturers certify and disclose levels of
biotech content. WTO rules call for trade regulations to be
based on science, and there is no scientific evidence to
warrant restrictions of any kind, including mandatory labeling,
on biotech foods. Karunanayake again assured A/S Lash that Sri
Lanka's market would remain open to biotech foods, pledging
that Sri Lanka would not adopt a mandatory labeling scheme.

6. A/S Lash also used the meeting with Karunanayake to press
the GSL to move forward with several pending U.S. commercial
projects. He noted that Sri Lanka is interested in attracting
interest from more U.S. companies; the best way to do so is to
enlist champions of Sri Lanka in corporate America - companies
that have been successful doing business here and will
encourage others to invest as well. A/S Lash raised
Caterpillar's proposal before GSL to provide 100 MW of power
generation; the U.S. expects a transparent process in awarding
the tender, and hopes that Caterpillar's project will be
approved. A/S Lash also brought up Tamsco's signed contract
with the Sri Lankan Ministry of Defense to supply radar spares,
which has been held up now for over a year; the principle of
sanctity of contracts is at stake, and the U.S. expects GSL to
honor its obligations in this contract in a timely manner.
Finally, A/S Lash mentioned IMC Global's long-running proposal
to mine phosphate in Eppawela (north-central Sri Lanka), noting
that the project had the potential to be Sri Lanka's biggest-
ever foreign investment.

7. A/S Lash noted that there are several sectors where U.S.
companies could pursue business in Sri Lanka. Companies like
Caterpillar are already exploring the power sector, but there
are numerous other U.S. firms who could bring expertise to Sri
Lanka in the broader infrastructure sector. IT is another area
where U.S. companies will likely show interest, provided they
can be assured of sound intellectual property protection. In
addition, A/S Lash urged GSL to open up its educational system
to private institutions, noting the demonstrated competitive
advantage of the U.S. in this sector.

8. Karunanayake inquired about the AFL-CIO's recent petition to
USTR to revoke Sri Lanka's GSP privileges. (Note: The AFL-
CIO's petition asks for revocation of GSP for Sri Lanka based
on alleged restrictions on union activity in Export Processing
Zones here. End Note.) A/S Lash explained the background of
the GSP program and the role of the private sector and NGOs in
the certification process. The U.S. government makes GSP
decisions on the basis of all relevant information, he said,
and it was impossible to predict what the outcome would be in
Sri Lanka's case.

9. Karunanayake also asked for "swing" on quota items, noting
that keeping employment going in the apparel industry would be
critical to Sri Lanka's prospects for peace. A/S Lash
explained the extreme difficulties in making any changes to the
quota system. Many countries - including many very close U.S.
allies - have requested quota swing and come away empty-handed.
A/S Lash promised to look into the matter but made it clear he
was not optimistic.

--------------------------------
Meeting with Minister of Finance
--------------------------------

10. A/S Lash and Ambassador Wills met on December 20 with
Minister of Finance K.N. Choksy. They discussed many of the
same themes A/S Lash covered above with the Minister of
Commerce, including the Caterpillar, Tamsco and IMC Global
proposals. A/S Lash asked Choksy about the status of GSL's
economic reform program. Choksy detailed the government's
privatization efforts, highlighting what the government had
already sold stakes in (petroleum, buses, telecom) and what
were the next items on the block (insurance, banking). A/S
Lash raised government tender procedures and the need for
complete transparency at every stage of the process. Choksy
said he hoped the privatizations would further decrease the
government's role in tenders. For any remaining public
tenders, GSL has set up a board to speed up the process; only
tenders above a certain threshold ($2.5 million) would need to
go to the Cabinet for approval.

11. Choksy emphasized his government's desire for greater
commercial engagement with the U.S., noting that two-way trade
was currently heavily in Sri Lanka's favor. Choksy asked what
the high-potential sectors for U.S. companies in Sri Lanka
might be. A/S Lash and the Ambassador listed infrastructure
(especially power), IT and education as the key sectors where
U.S. companies could profitably participate. A/S Lash noted
that education in particular was an area where the U.S. has a
competitive advantage; opening up Sri Lanka to private
education would attract interest from major U.S. institutions,
whose presence here would bring big benefits to the Sri Lankan
populace.

--------------------------------
Meeting with Board of Investment
--------------------------------
12. A/S Lash and Ambassador Wills met with Board of Investment
(BOI) Chairman Arjunna Mahendran December 20. After viewing a
BOI video presentation on what Sri Lanka offers the foreign
investor, A/S Lash encouraged Mahendran to keep pushing
economic reform within the government. The foreign investor
looks closely at issues such as transparency, intellectual
property protection and the level/pace of privatization. A/S
Lash cautioned Mahendran against letting other countries in the
region export their IPR violations to Sri Lanka. If Sri Lanka
does a better job cracking down on import of pirated products,
U.S. investors will be more inclined to trust their
intellectual property assets to this market. Improving the
local educational system, A/S Lash added, would enable Sri
Lanka to supply skilled workers in the quantities that foreign
investors demand. A/S Lash encouraged Sri Lanka to open its
educational system across the board to private operators, from
vocational training to university and professional education;
many U.S. institutions would likely show interest in entering
the Sri Lankan educational market. A/S Lash also emphasized
the importance of Sri Lanka raising its profile in the U.S.,
now that peace was developing. He pressed for Sri Lanka to
approve pending commercial deals (Caterpillar, Tamsco and IMC
Global), explaining again the importance of cultivating
champions of Sri Lanka in corporate America.

--------------------------------------
Meetings with Business Representatives
--------------------------------------

13. In a December 20 working breakfast hosted by the American
Chamber of Commerce, A/S Lash elicited the views of senior
AmCham members on the investment climate in Sri Lanka. Members
described the local environment for business as generally
positive - few restrictions on imports, a talented and literate
labor force and a BOI that truly streamlines investment
approvals. AmCham members raised several concerns, though.
Many commented that Sri Lanka's labor laws were too restrictive
(especially regarding terminations), discouraging possible new
investors from entering the market. Telecom policy was also a
big hindrance to productivity. Though the government had
nominally sold off part of Sri Lanka Telecom, the company still
controls the market in the absence of a truly independent
telecom regulator. As a result bandwidth is poor and line
charges are high. Members also decried the current level of
IPR protection in Sri Lanka, noting that GSL seems reluctant to
crack down on pirated knock-offs brought in from China. A/S
Lash emphasized that a main goal of the increased commercial
engagement with Sri Lanka was to improve the atmosphere for
U.S. companies doing business here. He asked AmCham reps to
continue to provide input to U.S. officials, so the U.S. can
prod Sri Lanka toward greater openness and transparency.

14. A/S Lash also met December 20 with the Ceylon Chamber of
Commerce (CCC), Sri Lanka's oldest and most active business
chamber, to hear members' views on the local investment climate
and opportunities for U.S. companies. A/S Lash emphasized the
need for greater two-way trade between the U.S. and Sri Lanka,
noting that the trade imbalance was currently 10:1 in Sri
Lanka's favor. Chamber members offered that the best prospect
for increasing U.S. exports was textile fabric, and that the
CCC was looking for ways to connect U.S. textile suppliers with
Sri Lankan apparel manufacturers. A/S Lash asked members what
their biggest concerns were on the investment climate.
Political instability, including the still nascent peace
process, and a poor tertiary education system were the greatest
obstacles to growth, members said. A/S Lash pressed CCC to
lobby the government hard to open the education system, noting
that major U.S. institutions could play an active and positive
role in the Sri Lankan education sector. Members praised the
USAID-funded competitiveness initiative for its role in
developing certain sectors and asked for additional technical
assistance in education, job creation and vocational training.

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Media reaction
--------------

15. Lash's visit generated lavish press coverage. A December
13 Embassy press release announcing his visit appeared in
independent and government-owned dailies, both English and
vernacular, under headlines such as "American trade minister
arrives," "U.S. Asst. Secretary of Trade will be in Sri Lanka
next week," and "U.S. Asst. Trade Secretary's visit to Sri
Lanka." On December 20 the "Financial Times" section of the
DAILY MIRROR (independent English daily) carried Lash's picture
and c.v., plus a table of U.S.-Sri Lanka trade data under the
headline "US trade with Sri Lanka." On December 20 the
Assistant Secretary and Ambassador Wills convened a press
conference for Sri Lanka's business, commercial, and finance
journalists. The conference resonated in English and
vernacular newspapers through the weekend. "Lanka's chances of
attracting foreign investment in IT look rosy - US Asst.
Commerce Secy" said the ISLAND (opposition English daily). A
similar story appeared in DINAMINA (government-owned Sinhala
daily) under the headline "Sri Lanka has achieved the
capabilities to attract foreign investment in many spheres."
THINAKARAN (government-owned Tamil daily) quoted Lash:
"Conducive environment for investment in Sri Lanka." The
MIRROR focused on Lash's compliance message with a story
headlined "US wants Lanka to nab pirated imports," and the
ISLAND followed suit with "US seeks crackdown against pirated
software, movies and music here." And many of the Island's
dailies highlighted the linkages that the Assistant Secretary
and the Ambassador drew between peace and prosperity. One
example: "Peace will grow Lanka-US investment, trade"
(MIRROR).

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Comment
-------

16. A/S Lash's visit reinforced many of the same messages
delivered by Deputy USTR Ambassador Huntsman during the first
meeting of the bilateral Trade and Investment Council last
month. It is now clear to GSL that achieving an enhanced trade
relationship with the U.S. will depend on its moving
aggressively to improve the local investment climate. A/S
Lash's emphasis throughout the visit on IPR protection sent a
strong signal to GSL that the U.S. will be watching its
progress on this issue in particular in the coming months. To
a large extent, we will be able to gauge GSL's commitment to
overall reform by how quickly and fully it improves IPR
legislation and enforcement.

17. A/S Lash has cleared this cable.
WILLS

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