Balancing Investor Friendly Land Policies and the National Interest
Posted on September 2nd, 2014

Pathfinder Economic Flash

Land: A Crucial Determinant of Economic Prospects.

As a factor of production, land is a crucial determinant of a country’s economic prospects. Under-utilized land undermines opportunities for gainful employment and wealth creation. It is important to recognize that the real value of land is not in itself but in the economic activity it facilitates. It also self-evident that land cannot be taken out of the country. In an economy, which is characterized by both a savings-investment gap and a deficit in the current account of the balance of payments, it can be counter-productive to introduce legislation which would deter foreign investment that can release the full value of large extents of under-utilized land. Discouraging foreign investment in a crucial factor of production, such as land, can transmit negative signals more broadly which will discourage much needed non debt-creating external inflows which are essential to achieve the government’s growth targets. It is a matter of concern, therefore, that the government is bringing forward legislation which could reduce foreign investment which can address the savings gap and the current account deficit in a sustainable manner.

The growth rates set out in the government’s medium-term Road Map cannot be met without a significant increase in foreign investment. Sri Lanka’s debt dynamics are such that the country’s growth model needs to become less dependent on foreign commercial borrowing and more on foreign investment. The Pathfinder Foundation (PF) is returning to the land policy theme for a third time because the twin objectives of releasing the full value of land and attracting significantly more foreign investment are crucial for realizing the country’s economic potential. This has to be an important part of the recipe of breaking-out of the legacy of mediocre economic performance that has characterized Sri Lanka’s post-independence era. More detailed treatment of these issues can be found in the PF’s 27th & 33rd Economic Flashes at www.pathfinderfoundation.org

Complexity and Sensitivity of Land Issues.

With economic modernization, land-related issues become more complex and sensitive. It becomes more difficult to balance the competing claims of food security; equity considerations related to asset ownership; shelter; provision of essential services; and releasing economic value, while attaching priority to environmental sustainability. For these reasons, land is an extremely emotional issue everywhere, particularly in small countries. It is imperative, therefore, to take a holistic view of the challenges related to land policy and undertake a constructive discussion on the subject. It should not be forgotten that land was one of the key issues underlying the separatist conflict that plagued the country.

As Sri Lanka is a small island nation, one can make a case for introducing some limitations on foreigners acquiring land. However, this argument needs to be balanced by the fact that the state continues to own about 80% of the land and there are large tracts of under-utilized land in the country. Foreign investment can assist in realizing the potential of this mostly under-utilized asset. In the rural sector, there is scope to review land-use patterns and crop mixes (particularly cultivation of high value crops for export). In urban areas, the potential exists to release state-owned land, particularly those belonging to government departments, such as the railways and the postal department. This would also serve to mobilize funds to strengthen the government balance sheet. The PF has advocated the establishment of a land bank supported by an online site.

Can Sri Lanka Afford to Transmit Negative Signals to Foreign Investors?

The proposed legislation is expected to prohibit freehold transfer of land to foreigners (non-citizens); foreign companies incorporated abroad; and companies incorporated in Sri Lanka where foreign shareholders account for more of the capital, unless they have been operating in Sri Lanka for 10 consecutive years. The last provision creates uncertainty regarding its practical implications, as a Sri Lankan company floated on the stock exchange can become a majority foreign owned company at any given time. Uncertainty is created when this is taken together with the proposal that the legal validity of a transfer of land to a locally incorporated company with less than 50% foreign shareholding will only be maintained if the foreign shareholding remains below 50% for a minimum of 20 consecutive years. Hence, if the ownership structure changes through legitimate share market operations whereby foreign ownership exceeds the 50% threshold, a previously legal land deal is invalidated. It is important, therefore, that the legislation is drafted in a manner which takes into account the nature of stock market operations. Failure to do so, will create uncertainty that deters both domestic and foreign investment (both FDI and foreign flows into the stock market).

The proposed legislation is also expected to introduce a Land Lease Tax of 15% on land transfers to the three categories of foreign entities specified above. It involves an one-off upfront payment based on the lease value of the land. It is 7 ½% for companies which are locally incorporated where the foreign shareholding is above 50%, provided such a company has been operating in Sri Lanka for a minimum of 10 consecutive years, as well as for condominia, based on conditions which have been specified in relation to the length of the lease. The lease of land in the BOI zones; tourist development areas; industrial estates; and other areas stipulated by the Minister concerned will also be subject to the reduced 7.5% tax.

The Land Lease Tax will raise prices and discourage purchases resulting in inflationary implications for the property market and the construction industry with consequences for overall growth, employment and incomes in the economy.

Throwing the Baby out With the Bathwater.

The proposed legislation on foreign ownership of land imposes restrictions which are likely to deter foreign investment. While a number of important exemptions have been built-in to the legislation, and the Minister responsible for land along with the Cabinet of Ministers, have the discretion to grant further exemptions, the overall message is likely to be negative. In a world where almost all countries are competing for internationally mobile capital, introducing restrictions, uncertainty and unpredictability through legislation reduces the competitiveness of a country as an investment destination. The proposed Land Lease Tax has to be seen as a tax on all foreign direct investment as it will inflate land/property prices which are an important determinant of the destination of a large proportion of FDI. Domestic businesses will also be adversely affected by the increase in the price of land. Large and small businesses will be discouraged by this trend with particularly negative consequences for start-up and expansion plans.

Measures, which discourage or deter foreign investment in a country with twin savings and foreign exchange gaps (and concerning debt dynamics), can well be seen as a case of ‘throwing the baby out with the bathwater’.

This is the Fifty First Economic Flash published by the Pathfinder Foundation. Readers’ comments are welcome at www.pathfinderfoundation.org

7 Responses to “Balancing Investor Friendly Land Policies and the National Interest”

  1. Lorenzo Says:

    This article has MANY ERRORS.

    1. “However, this argument needs to be balanced by the fact that the state continues to own about 80% of the land and there are large tracts of under-utilized land in the country.”

    FALSE. Today it is less than 80%. The country must have 20% forest cover for ecological reasons. That is productive use. Rivers, mountains, coastline, etc. are essential land govt. must own. These are 40% of land. Govt. establishments, roads, military camps are essential. These account for the rest.

    So there is NO land the govt. can lose ownership.

    2. Foreign investors DO NOT need land ownership. Why do they need land OWNERSHIP? No need. They can LEASE.

    3. MANY Sri Lankans living in SL don’t have an INCH of land. So it is foolish to allow foreigners to own land. First let all Sri Lankans living in SL have enough land. Then lets allow foreigners to own land.

    4. LTTE diaspora is trying to BUY THEIR WAY to SL. This is a BIG threat. We must stop it.

    5. ISIS is trying to BUY THEIR WAY to SL. This is a BIG threat. We must stop it.

    NO land ownership to foreigners!

  2. Lorenzo Says:

    Foreign investment can come to SL WITHOUT land buying. Don’t mix the 2.

    I have my VERY STRONG RESERVATIONS about Milinda Moragoda. He was the foreign minister and peace minister when the treacherous CFA was signed with LTTE TERRORISTS when the world was on war against terror. CFA RUINED SL.

    He was also a director of MANY finance companies and banks that gobbled billions of poor people’s savings and vanished!!

    I’m not saying he is at fault. All I say is his JUDGEMENT has not been very good to be party to these bad things.

    (Hope the editor will NOT delete my post. This is the well known truth and I have the right to express my opinion.)

    NO land ownership to foreigners! Let them LEASE so that we have a CONTINOUS flow of foreign money to pay the lease.

  3. Nanda Says:

    In Singapore, very little land is owned even by citizens. Most citizens buy flats on 99 year lease.

  4. Nanda Says:

    More or less whole of our coast line is owned by foreigners by using illicit methods. Many whites have bought land using loca’ls names.

  5. Nanda Says:

    “I have my VERY STRONG RESERVATIONS about Milinda Moragoda. He was the foreign minister and peace minister when the treacherous CFA was signed with LTTE TERRORISTS when the world was on war against terror. CFA RUINED SL.”

    – very true. He found the path to destruction of many young lives.

    Just study the way Singapore operates. Publish it. If they can attract huge amounts of investments why can we ?

    It is because of other reasons.

    A Singapore company I worked expanded to Sri Lanka. They were very enthusiastic at the beginning. After few years they folded and went back. Reasons ?
    1. Corruption
    2. Corruption
    3. Corruption
    4. Impossible to manage local staff because of political interference
    5. law and order scare
    6. Cheating by locals

    We have to change from Maha Eka downwards.

    Sri Lanka cannot afford foreign land ownership. No way.

    CFA gave 40% land to terrorists and Milinda is a part of it.

  6. Marco Says:

    Very informative and topical article.

    I know most Foreign Investors in the Manufacturing sector look to the Land value as an important tool to make their ROI targets work and also to leverage up on local debt. Already certain Foreign investors are nervous of their security of tenure on the land occupied by their plants. Introducing counter productive legislation will drive away FDI.

    Interesting the Colombo Port City only 125 hectares of the 233 hectares to be retained by the Govt (SLPA) whilst 20 hectares to be retained by the company CHEC under full ownership and the balance sold by the company to recover the cost of development under a 99 year lease to other investors without any restrictions.

    It is rather worrying to read the penultimate paragraph ..”a number of important exemptions have been built-in to the legislation, and the Minister responsible for land along with the Cabinet of Ministers, have the discretion to grant further exemptions, the overall message is likely to be negative.”

    Think we all know how the “discretion” exercise works in Sri Lanka

    kerching!

  7. Lorenzo Says:

    DENY land ownership to LTTE diaspora terrorists at any cost.

    Now these terrorist LOSERS are trying to buy their way into SL.

Leave a Reply

You must be logged in to post a comment.

 

 


Copyright © 2018 LankaWeb.com. All Rights Reserved. Powered by Wordpress