The Regulation of Foreign Investments in Sri Lanka

Abstract

Sri Lanka has been a host State to foreign investment since it adopted an open economic policy in the late 1970s, from which time it has entered into successive investment treaties. Foreign investment in Sri Lanka recorded a steady, though not exponential, growth during the fractious years of civil strife. Sri Lanka entered the present decade hoping to rapidly scale its foreign investment via strong post-war leadership, but found its attractiveness as a host State challenged by other countries in South and Southeast Asia that offered better incentives and conditions. In addition, several negative experiences in dispute resolution fora left the State reeling, as it found itself having to pay compensatory sums that often far outweighed the projected benefits of the investment. The island State, once prized for its strategic location, has found this to be a double-edged sword, as regional superpowers vie for investment opportunities in Sri Lanka that would indirectly yield security benefits in the Indian Ocean, rather than revive or improve its export performance or inject other types of investment that Sri Lanka also needs. Against this backdrop, this paper presents and attempts to analyse the Sri Lankan experience of foreign investment. It aims to assess the political background to foreign investment in Sri Lanka, as well as associated legal developments and the State’s treatment of investors – including disputes to which Sri Lanka was a party. In the process, it will comment, by use of comparative information from other countries, on policy and legal measures that the State could have taken – or could take in the future – to ensure that investing in Sri Lanka is seen as a worthwhile commercial venture by diverse actors, and not only as a strategic move by regional powers. The authors contend that Sri Lanka has previously relied unsuccessfully on a ‘leader-driven’ model, which relies on those currently in power and their preferred foreign partners to grow foreign investment. They argue in favour of rapidly moving to a holistic and rules-based approach that goes well beyond making investment treaties, and present a multi-step plan of political and legal measures towards this end.