A New Battle for Ceylon
group of 43 businessmen from Colombo, Sri Lanka’s capital city, were shocked to see the devastation when they landed in Jaffna in early July. Returning after three decades, they remembered this palm-fringed peninsula surrounded by blue lagoons had once been a thriving hub for industry. As many as 750 small factories churned out everything from household articles to export items in the 1970s. Now, they were all gone. What greeted them was broken bridges, burnt homes and families torn by the 26-year-long civil war. Hardly a place to talk business.
The scene elsewhere in the region is no different. The caustic soda factory in Paranthan is in ruins, the Kankesanthurai cement plant is dysfunctional and Valaichchenai paper factory has been idle for long. Even in Colombo, a city living under the constant shadow of terrorism, the mood is somber. The country came dangerously close to defaulting on its international payment obligations in March, when its foreign exchange reserves dipped to a mere $1.3 billion. President Mahinda Rajapaksa rushed to the International Monetary Fund (IMF) and got a $2.6 billion bailout that has imposed strict conditions for fiscal discipline. He will have to raise taxes and cut expenditure to rein in a whopping 7 percent budget deficit.
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Image: Buddhika Weerasinghe/ Reuters
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Why does investment guru Jim Rogers now recommend Sri Lanka as the most compelling investment destination? | |
Then, why does investment guru Jim Rogers now recommend Sri Lanka as the most compelling investment destination?
The answer, simply, is that the civil war is over. The separatist Liberation Tigers of Tamil Eelam (LTTE) has been put down. The same ruin that kept the embers of despair aglow has now become the spark of opportunity for the shrewd businessman. “I have seen that when a long war like this ends, there rise enormous opportunities for investment,” Rogers, co-founder of Quantum Fund and author of classics such as Investment Biker and Adventure Capitalist, told Forbes India. “Sri Lanka will need to be rebuilt now and there’s little capital within the country.”
Ask Roman Scott. This Singapore-based British private equity manager, with family roots in Sri Lanka, believes the island nation’s time has arrived. “It is going to be one of the best investment opportunities on the planet for the next two to three years,” he says. His Calamander Group has launched the world’s first PE fund exclusively focussed on Sri Lanka, with a likely corpus of $50-75 million. Scott says the conflict shaved off 1.5-2.5 percent from the gross domestic product (GDP) and even then, Sri Lanka has been the fourth fastest growing economy in Asia in recent years.
As fighting raged, most foreign investors avoided Lanka and hence there is very little competition across the business spectrum. Those quick to invest will get to choose from the business of rebuilding the nation as well as the consumer market that a healthier society will unleash.
Sizing up the Pie
Just how much money Sri Lanka needs to rebuild itself is still unknown. But just the initial investment needed to fix the stalled economy in the north and east is a $5 billion business, according to government estimates. Roads, bridges, schools, hospitals, power plants and even homes have to be built afresh. So, the final tally will be several times larger.
But the sweet spot for the foreign investor is not the war zone. The relatively peaceful Western Province, where Colombo is located, is a ready market waiting to be tapped fully. The infrastructure and a consumer economy are already there, but the war kept away many providers of goods and services. They will come now. This province, which accounts for half of Sri Lanka’s $40 billion economy, will be the first to gain from peace.
Scott says Sri Lanka is today in the position that India was in 1991, minus the war, of course. Colombo has just come out of a foreign exchange crisis, needs to fix its finances and can very well use the crisis to silence protectionists and launch economic reforms. “It has all the potential of India at half the price, with no competition.” In fact, Calamander is especially targetting Indians for investing in its Lanka fund.
Sri Lanka has traditionally excelled in tea, tourism, garments and rubber.
Business potential in these areas remains, though in niche segments within. Tea plantations, dominated by trade unions, may not be as attractive anymore but downstream segments like blending, packaging and branding will be. In the capital-intensive tourism sector, where payback can take four years or so, the risk is another terrorist attack will drive away tourists. Apparel export is crowded and dependent on single large orders.
The new opportunities will not be in the sectors Sri Lanka is known for. They will be in real estate, business process outsourcing, banking, timber, pepper, fisheries, education, healthcare and of course, infrastructure.
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