VZCZCXRO4585
OO RUEHBI RUEHLMC
DE RUEHLM #1093/01 2201144
ZNR UUUUU ZZH
O 081144Z AUG 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6580
INFO RUEHKA/AMEMBASSY DHAKA 0334
RUEHIL/AMEMBASSY ISLAMABAD 7317
RUEHKT/AMEMBASSY KATHMANDU 5430
RUEHLO/AMEMBASSY LONDON 3953
RUEHNE/AMEMBASSY NEW DELHI 1250
RUEHNY/AMEMBASSY OSLO 4021
RUEHKO/AMEMBASSY TOKYO 3107
RUEHKP/AMCONSUL KARACHI 2227
RUEHCG/AMCONSUL CHENNAI 7909
RUEHBI/AMCONSUL MUMBAI 5558
RUEHBS/USEU BRUSSELS
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEFDIA/DIA WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHHMUNA/HQ USPACOM HONOLULU HI
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION
UNCLAS SECTION 01 OF 05 COLOMBO 001093
SIPDIS
SENSITIVE
SIPDIS
STATE FOR SCA/INS AND EEB/IFD/ODF
MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE
TREASURY FOR LESLIE HULL
E.O 12958: N/A
TAGS: EAID ECON EINV PTER CE
SUBJECT: SRI LANKA: EAST DEVELOPMENT -- TRINCOMALEE NOT READY TO
REALIZE POTENTIAL
REF: A) COLOMBO 971 B) COLOMBO 1057 C) COLOMBO 882 D) COLOMBO
1003
1. (SBU) SUMMARY: Trincomalee, the eastern seaboard town boasting
one of Asia's finest natural harbors, is underdeveloped and
depressed as a result of over two decades of civil war in Sri Lanka.
The government wants to translate its recent reassertion of control
over the east into development, much of it based around
Trincomalee's great economic potential. It has designated a
Trincomalee Special Economic Zone into which it hopes to attract
foreign investors. But the government's overly centralized approach
to development and the still unsettled security situation make it
likely that Trincomalee will continue to languish for many years.
End summary.
TRINCOMALEE: AWESOME NATURAL HARBOR, DEPRESSED TOWN
--------------------------------------------- ------
2. (SBU) Trincomalee, on Sri Lanka's east coast, has been renowned
for centuries for its large, deep, and protected natural harbor. If
Sri Lanka had not been at war for the last quarter century,
Trincomalee now surely would be a major import and export hub.
Instead, it is depressed, dilapidated, and barely developed. A 2001
census estimated the town's population at 26,000, down from 44,000
in 1981. Rice farming remains the major occupation for the
district's 395,000 residents. The Government of Sri Lanka, having
recently re-established control over the country's east (ref A),
believes it is now possible finally to tap Trincomalee's potential.
3. (SBU) In October 2006, the Board of Investment established a
Special Economic Zone on 679 square kilometers spreading out from
the harbor. The Board hopes to attract foreign investors to
establish a mix of light and heavy manufacturing, a power plant,
agriculture, and tourism attractions like whale watching and water
sports. The harbor makes Trincomalee's raw potential obvious, but
the possibility that the ethnic separatist Liberation Tigers of
Tamil Eelam (LTTE) could again emerge in the vicinity as a threat to
economic activity may keep investors on the sidelines until the area
proves truly peaceful. Econoffs and USAID staff visited Trincomalee
July 31-August 2 to assess the economic environment in light of the
government's impending release of a plan for how it envisions
developing the Eastern Province (ref B).
SOLDIERS AND POLICE EVERYWHERE
------------------------------
4. (SBU) Trincomalee has been a hotspot in Sri Lanka's long war
against the LTTE and related civilian violence. In April 2006
Singhalese rioters burned shops and homes belonging to Tamils
following a bomb explosion in a local market and claymore mine
attacks on soldiers in Trincomalee. Twenty civilians died in the
violence and an estimated 1,000 Tamils fled their homes. There have
been smaller episodes since then, and the town and district are
under virtual lockdown. The military and police maintain a series
of checkpoints on the main road into town; all vehicles are stopped
at these. Bus passengers get out and walk through a physical search
aisle, getting back on their buses 50 meters down the road. Trucks
are checked carefully for explosives. Backlogs at the checkpoints
can cause waits of 30 minutes or more. In town, fully helmeted and
body-armored soldiers, police, and home guards carrying automatic
weapons are everywhere. Many keep their faces covered with black
bandanas. Pedestrians are unable to walk more than 100 meters
without being checked for identification and questioned. Security
forces routinely walk into shops along their patrol routes. Sri
Lanka's largest navy base, a major air force training base, and an
army division are all located in Trincomalee.
COLOMBO 00001093 002 OF 005
SMALL AND MEDIUM ENTERPRISES: STRUGGLING AND ALIENATED
--------------------------------------------- ---------
5. (SBU) The Chamber of Commerce and Industry of Trincomalee, formed
in 2002, is housed in a non-airconditioned office whose only
automation is a handful of computers donated by USAID. The
Chamber's 164 members are small and medium size enterprises in such
fields as construction, rice milling, small hotels and retail sales.
Chamber board members told us that, aside from rice production,
business is poor. There is little commerce aside from trade in food
and daily essentials in produce markets and small shops. Many
residents depend on remittances from relatives working abroad.
Entrepreneurs have little access to financing, as banks are
reluctant to lend money for investments that could fail if the
security situation declines again. For example, building
contractors seeking to bid on projects financed by the World Bank
and the Asian Development Bank have found some banks unwilling to
issue bid bonds and performance bonds unless the contractors could
post 100% deposits on the value of the bonds.
6. (SBU) Chamber members gave a pessimistic assessment of the
government's plans to revitalize Trincomalee with a Special Economic
Zone. The government did not consult local businesses before
establishing the zone. Residents are worried that they will be
forced to move to make way for outside investors. They would be
willing to move if they could be trained to work in the new
enterprises, but the lack of consultation makes them doubt whether
they will see real benefits from the changes. Some Chamber members
also suspect that Tamils and Muslims in particular would be
dislocated and unable to benefit from development. They noted that
many Tamils and Muslims had left the area because they felt insecure
and said that the Karuna paramilitary group had moved into some
unoccupied homes belonging to these people.
THREE BIG MANUFACTURERS: INSULATED FROM STRIFE,
READY TO EXPAND
--------------------------------------------- --
7. (SBU) In contrast to the Chamber members' concerns, managers of
three large foreign-owned industrial operations in Trincomalee
described a secure and profitable business environment. The three
facilities lie nearby one another in the China Bay section of
Trincomalee harbor, where each has its own jetties in 9 to 15
meter-deep water, capable of berthing all but the very largest cargo
ships in use today. These operations find the harbor highly
conducive to import of raw materials that they then process on-site
and conveniently load onto rail, truck, or back onto ships for
transport elsewhere in Sri Lanka or abroad. Each dominates its
market in Sri Lanka and plans to expand operations. These companies
have head offices in Colombo and have no difficulty consulting with
government officials as needed.
- Lanka Indian Oil Company was formed in 2003 when Indian Oil
Company (IOC) bought a third of the fuel storage and retail sales
outlets of state-owned Ceylon Petroleum Corporation. The deal gave
Lanka IOC ownership of a network of 150 filling stations around the
country and possession,on a 35 year lease, of an oil tank farm in
Trincomalee built by the British during World War II. Lanka IOC
will soon complete an expansion enabling it to mix lubricant oils
onsite for sale in Sri Lanka and for export. Lanka IOC is also
interested in building an oil refinery. Security guards account for
a third of the company's 150 staff in Trincomalee.
- Tokyo Cement, a Japanese-Sri Lankan joint venture that is 45%
publicly owned, has the largest market share -- 30% -- of the five
cement brands in Sri Lanka. It produces 2.4 million tons of cement
COLOMBO 00001093 003 OF 005
per year, and is currently expanding to double the output of its
Trincomalee plant. The total investment amounts to $100 million in
plants in Colombo and Trincomalee, including a new 10-megawatt
biomass power plant that will power the Trincomalee facility and
yield excess power for sale to the national grid. The plant employs
135.
- Singaporean flour company Prima operates one of the largest flour
mills in the world, producing 2,600 metric tons of wheat flour per
day, some of which it exports. Prima is the only wheat flour
producer in Sri Lanka, but has some competition from imported flour.
It currently imports 95% of its wheat from Canada and about 5% from
the United States. Prima employs 400 permanent and 250 part-time
employees. It has applied to the Board of Investment to expand its
operation to include food processing facilities and a warehouse next
to its flour mill.
CENTRAL GOVERNMENT'S AGENT: ENFORCING SECURITY
---------------------------------------------
8. (SBU) Retired Army Major General T T R De Silva is the District
Secretary in Trincomalee, appointed by President Rajapaksa in June
SIPDIS
2006 and responsible for all aspects of civilian administration. He
is the first retired military officer to serve in the normally
civilian role, which comes under the Ministry of Public
Administration and Home Affairs and which many still refer to by its
former designation, "Government Agent." De Silva, who previously
held commands over military forces in the East and Colombo, has
drawn criticism from civil society organizations both foreign and
domestic for his military approach to governance. With us he
appeared concerned almost exclusively with ensuring security in
Trincomalee. When asked about talk that the government would erect
a fence along the ring road it was building around Trincomalee, he
confirmed the plan (but did not want it widely known), analogizing
the beaten LTTE to embers that could ignite again if exposed to a
breeze. The fence would help prevent this, he explained, by making
it easier for security forces to patrol Trincomalee's perimeter and
to seal and search the town if necessary.
9. (SBU) De Silva shared the Board of Investment's vision of
Trincomalee hosting a range of economic activities including
industry, agriculture, fishing and canning, handicraft production,
and tourism. He seemed intent on convincing India that Sampur, on
Trincomalee's remote southern peninsula, was the best location for a
proposed 500-megawatt coal-fired power plant joint venture that the
two governments have been discussing for the past few years. De
Silva clearly liked the idea of replacing the formerly LTTE-infested
Sampur jungle with a major Indian installation whose security would
help ensure that the LTTE stayed out. (Note: Indian High Commission
Econ chief recently told Econoff that, as reported in the press,
India is in no rush to proceed with the power plant and is waiting
for the government of Sri Lanka to propose other possible
Trincomalee sites besides Sampur.)
10. (SBU) De Silva told Emboffs that, despite parts of Trincomalee
being designated as High Security Zones (ref C), and much of the
area now categorized as a Special Economic Zone, no residents would
be displaced against their will. He believed consultation with
local business people had been adequate: "They can tell the Board of
Investment what they want." He downplayed reports that the Karuna
group routinely moved around Trincomalee at night armed and
unchallenged by police or the army, saying they were used to being
armed and would feel insecure without their weapons. Instead, he
asserted "we don't let them carry guns at night."
PROVINCIAL OFFICIALS: IN TOUCH, BUT OUT OF MONEY
--------------------------------------------- --
COLOMBO 00001093 004 OF 005
11. (SBU) Provincial level officials from the Ministry of
Agriculture are working hard to help local farmers improve their
productivity, according to the Ministry Secretary for the Eastern
Province. They state that 65% of area residents are dependent on
agriculture, but that the sector was badly hurt by the protracted
fighting, which caused fields to go untended, livestock to scatter
into the wild, and irrigation facilities to fall into disrepair.
Addressing these needs was one priority for the ministry; another
was attracting large investment into rice and maize production in
order to significantly increase output. However, the ministry
allots its provincial officials very little money and insufficient
staff for these needs. International NGOs provide more funds than
does the central government, but for very specific activities.
12. (SBU) The Board of Investment and the Sri Lanka Ports Authority
also have offices in Trincomalee; both are caretaker operations with
all policy and most operational matters handled in Colombo. The
Board of Investment had six people, but five have returned to
Colombo. The remaining official, S. Satkunalinkam, told us that
Phase I of the planned industrial zone had been demarcated on land
formerly belonging to the Sri Lanka Port Authority. Contrary to the
Government Agent's assurance, he said that about 5,200 families
would have to be moved out of the 1635-acre zone. He thought they
would not object though, as they would be given new homes and would
have the opportunity to find jobs (Note: Colombo officials told us
they expect the zone to produce 30,000 jobs). Satkunalinkam said he
knew the Trincomalee Chamber of Commerce people, but gave no sign
that he consulted with them regularly.
13. (SBU) The Ports Authority runs a small port operation that loads
and unloads roughly one ship a month -- usually an inbound shipment
of coal for a cement factory on Sri Lanka's west coast and an
outbound shipment of mineral sand bound for Russia, plus occasional
military vessels bound for Jaffna with relief supplies. The port
owns three tugboats that help dock the cargo ships coming and going
from the Lanka IOC, Tokyo Cement, and Prima jetties. For this the
port has 668 unionized civil servant employees -- far more than
needed, but their positions cannot be eliminated.
COMMENT: GOVERNMENT'S TOP DOWN APPROACH WILL
ADVANCE POLITICAL OVER ECONOMIC GOALS
-------------------------------------------
14. (SBU) Trincomalee's near-term future is dependent on two
interlinked variables: the central government and the security
situation. Neither gives much cause for optimism. The central
government is not an effective planner and manages to mire most of
its initiatives in bureaucracy. For example, Prima's expansion
plans, though quickly approved by the Board of Investment, have been
tied up for months with the Central Environmental Authority.
Provincial officials are more in touch with local needs than are
central bureaucrats and politicians, but with Sri Lanka allocating
only fifteen percent of the national budget to provincial and
district level government operations, the provincial officials lack
sufficient resources to make a difference.
15. (SBU) As for the security situation, the LTTE will likely remain
a destabilizing force. Following its retreat from the east, it
stated that it would attack military, government, and economic
targets. Shortly after, it appears to have assassinated the Chief
Secretary of the Eastern Provincial Council (ref D). In this light,
SIPDIS
the government's preoccupation with security in Trincomalee is
understandable. However it is not confidence-inspiring; nor will a
fence around the town send a positive signal to international
investors or even to skilled Sri Lankans whom new enterprises will
need to recruit from elsewhere in the country. For these reasons,
COLOMBO 00001093 005 OF 005
Trincomalee still appears many years away from reaching its economic
potential.
MOORE