FREE TRADE ZONES – APPLICATION OF LABOUR LAW AND THE EFFECT OF PRIVATISATION
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THE concept of Free Trade Zone came into Sri Lanka in the year 1977.
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1970 to 77 was a period, which has got into the history of the Country as a period of controlled economy. This controlled economy, in the eyes of the United National Party, which won the elections in 1977 has brought more hardships to the people than good, and thus the party, which came into Power in the year 1977 under Mr.J.R.Jayawardene began a period of doing away the controlled economy and trying to follow the concept of liberalisation and free market economy policies.
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Therefore, it can be said that Liberalisation commenced in the year 1977 with the general dismantling of Trade and Tariff barriers and the adoption of free market economy policies.
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After 1977, effort was made for the first time to attract Foreign Investment as means of speeding up the development process of the economy in Sri Lanka. To effectively speed up the Economy and to attract foreign investment, Law No.4 of 1978 known as “Greater Colombo Economic Commission Law” was passed. The preamble to the Law spells out the purpose of the Act as follows:-
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“A Law to establish the Greater Colombo Economic-Commission : to VEST the said Commission with powers necessary for the development and resurgence of the economy of the Republic
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By the aforesaid Law the Greater Colombo Economic Commission was established as an autonomous Statutory Body functioning directly under the President of Sri Lanka. This body was again entrusted with the responsibility and task of promoting foreign investment, maximising or increasing exports, and inducing transfers of technology and generating employment opportunities.
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Section 3 of the Law No.4 of 1978 spells out the objects of this Commission. Similarly, Section 5 of the said Law gave the Commission an area of jurisdiction
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Section 5 is as follows:- The Commission shall have jurisdiction in and over –
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3) any licensed enterprise
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This again provides a special area known as “EXPORT PROMOTION ZONE” and this was first established at the Katunayake Zone, with a land of 190 Hectares in extent in the year 1978. Thereafter a Biyagama zone with 180 Hectares was opened. Finally in the year 1991 Koggala Zone was opened up in the South and these three Zones were known as “EXPORT PROCESSING ZONES”.
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The opening of the Katunayake Export Processing Zone gave birth in Sri Lanka to what is known and commonly called “FREE TRADE ZONE”.
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The Greater Colombo Economic Commission Law No.4 of 1978 was amended after 15 years from its inception by Greater Colombo Economic Commission (Amendment) Act No.49 of 1992, which Act changed the name of Greater Colombo Economic Commission to “BOARD OF INVESTMENT’.
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The Board of Investment derived its powers from the Greater Colombo Economic Commission (G.C.E.C.) Law No.4 of 1978 and its subsequent Amendments including Act No.49 of 1992. Section 17 of Law No.4 of 1978 empowers the Board of Investment referred to commonly as “B.O.I” to grant special concessions modifying or varying the provisions of the Inland Revenue Act, the Exchange Control Act and the Customs Ordinance. At present the scope of B.O.I’s power is considerably extended, and many exemptions granted under Section 17, in order to stimulate the national economy by promoting exports and generating development in the areas adjoining Colombo.
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* LL.B, Dip. in Industrial Law; Attorney-at-Law.
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“G.C.E.C” then, now “B.O.I”, has as an initial step established two export processing Zones at Katunayake and Biyagama. These two Zones became well developed industrial estates with good access roads, Telecommunication facilities, Fax, Telephone, good Electricity and water supply, intelligent, literate hardworking employees, and a labour force living in close proximity to these two Zones.
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As a result of the success of the Katunayake Zone and Biyagama Export Processing Zone, which brought in desirable results, it became necessary for the Government of Sri Lanka to think in terms of another export promotion Zone in June 1991.
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Therefore, in June 1991, the 3rd Zone was inaugurated in the South of Sri Lanka at the famous village known for its cultural values called “Koggala”. This Koggala Zone is close to the Fort of Galle. The idea behind the opening of the 3rd Free Trade Zone in Koggala was to take the development process into the Provinces as the Government thought the development of the country through the development of the Provinces would be a boon to Sri Lanka in order to achieve its goal of being a ‘Second Industrial Country’ by the year 2000.
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It can be stated that the G.C.E.C. or B.O.I.’s 15 years of existence, has seen a complete overhaul of Sri Lanka’s economy, the opening up of major new sectors for export markets, and substantial up-grading of Sri Lanka’s infrastructure. It also can be said that the “G.C.E.C” or “B.O.I” is credited with earning for Sri Lanka a global recognition as a country capable of producing quality goods that satisfy even the most competitive World Markets and as a viable location for investment. The credit for earning such a name should go to the management of B.O.I. and the workers of Sri Lanka who work in the three ‘FREE TRADE ZONES’.
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Today the B.O.I. manages three very viable export promotion Zones, representing a total investment of Rs.9,881 Million, and employing 76 thousand workers in 125 factories inside the Export Promotion Zones of Katunayake, Biyagama, and Koggala. Outside the E.P.Z (Export Promotion Zones) in other regions of Sri Lanka, 86 licensed enterprises and over 320 other enterprises are in operation within the B.O.I.’s purview providing employment to about 113,597 employees.
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In a little over a decade and a half, three export promotion zones have :
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PROJECTS IN OPERATION: KATUNAYAKE BIYAGAMA KOGGALA LICENSED TOTAL 73 40 10 102 225 EMPLOYEES: 53,661 21,173 4,210 34,553 113,597
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Statistics of the 200 Garment Factories started in 1991 are not included in this analysis.
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Setting up of Projects are not confined to the Zones alone. They could be established in any part of the country. In the year 1992, 369 Projects have been approved by the B.O.I, with total investment of Rs.38.3 Billion of which foreign investment component is Rs.24 Billion. In the year 1991 investment amounted to Rs.28.1 Billion of which 15.4 Billion was foreign investment. In can be stated that the success of these three Zones and the B.O.I.’s effort attracted investment in more areas outside the zones.
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In 1977 Sri Lanka’s external resources were a mere U.S. Dollars 711 Million, and unemployment stood at 26 per cent. In 1991 external resources totalled U.S; Dollar 1156 Million and unemployed was down to 14 percent and per capita income has reached U.S. Dollar 465. By 1992 per capita income was U.S. Dollar 510 which is the highest in the South Asian Region.
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As success of the Export Promotion Zone depended mainly on the attitudes adopted by the G.C. E.C. now known as B.O.I, the B.O.I, enjoys great privileges and authority, which no other statutory body in this Country enjoys by law. As the Government of Sri Lanka had started a free market policy and Liberalisation of the economy, it has given such authority to the G.C.E.C. or B.O.I, in order to develop the country as an Export Promotion Zone. Therefore, as the sole authority for approving and promoting foreign investment within the Export Promotion Zones, namely; Katunayake, Biyagama, and now Koggala and outside these three E,P. Zones, the B.O.I, not only approved the foreign investments, but also provided a wide array of services to the foreign investors and foreign companies which came to set up their companies and factories with the approval of B.O.I, in the E.P.Z’s and outside the Zones, in Sri Lanka.
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The Board of Investment offered it’s services by securing Visas for the foreigners, approving Project proposals, inspecting land, finding workers and then assisting with the import and export procedures. Thus, many procedures were simplified by the B.O.I, for all companies and factories which are opened in the Export Promotion Zones and outside with B.O.I’s approval. Actually most of the economists declared it as a “ONE STOP SHOP” for foreign investors. The B.O.I, took very little time in processing any project which sought its approval. They set an example to the other Government Authorities by showing how quickly Project Approvals can be handled. Therefore, the B.O.I.’s approach to simplifying procedures, attracting prospective investors, and protecting them from bureaucratic hassals and delaying tactics, in my opinion, point to the secret of B.O.I.’s success with regard to its Export Promotion Zones.
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Foreign investment is permitted by the B.O.I, in all sectors of economy in Sri Lanka except in few area of activities. Foreign investment at the moment is not permitted in the spheres mentioned below :-
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3. RETAIL TRADE with an investment of less than One Million U.S. Dollars
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4. PERSONAL SERVICES other than for Exports or Tourism
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Therefore the above named five Sectors are specially reserved and protected for the benefit of Sri Lankan Citizens.
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Besides the above-mentioned five Sectors, 13 other Industrial and Service Sectors for which licences are required, are approved by the several other agencies and statutory authorities, in addition to the B.O.I. These include :-
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d) TRADING SERVICES on the Colombo Stock Exchange
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g) ANY INDUSTRY manufacturing arms and ammunition, explosives, military vehicles and equipment, aircraft, and any other military hardware
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h) ANY INDUSTRY manufacturing poisons, narcotics, alcohol, dangerous drugs, and toxic hazardous or carcinogenic materials
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i) ANY INDUSTRY producing currency, coins or security documents
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j) PRODUCTION AND DISTRIBUTION of energy and power
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k) LARGE SCALE mechanised mining of gems
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l) BRANCH OR LIAISON OFFICE OF COMPANIES incorporated outside Sri Lanka
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For example, if a foreign investor wishes to set up an “OFF-SHORE BANK” or an International Bank in Sri Lanka, in addition to the B.O.I, approval, he has to obtain the Central Bank approval, Ministry of Finance clearance, Cabinet approval, etc.
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The procedure so far adopted and followed by the B.O.I, in Sri Lanka has already spelled out the fact that approvals for foreign investment in most instances are automatic except in the below mentioned instances :-
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(a) In the case of the 15 Sectors listed below where Foreign Investment of over 40 per cent is subject to evaluation :-
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1. any Projects where Sri Lanka’ s exports are subject to Internationally determined quota restrictions
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2. growing and primary processing of tea, rubber, coconut, cocoa, rice, sugar, and spices
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3. mining and primary processing of non-renewable natural resources
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4. timber based Industries using local timber
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5. construction of residential buildings:
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6. fishing (other than deep sea fishing)
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10. professional services
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(b) Where Fiscal and Financial Incentives under B.O.I. Law are being approved.
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Generally, to obtain any approval for a Project from the B.O.I, it will take between 2 to 4 weeks. The B.O.I, treat certain Sectors as Target Sectors. The Decade of Exports gives great prominence and importance to the development of these Sectors. They are :-
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1. Manufacture and export of non-traditional products
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2. Cultivation and processing of primary products
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6. Export oriented Projects in Provincial Areas
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7. Industrial and Urban Infrastructure
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9. Training Institutions of the Garment and IT Industries
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10. Backward Linkage Projects.
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Why have the Foreign Investors and the Local Collaborators so far come in large numbers to open Companies and Projects and to obtain special approval to such Projects from the B.O.I, of Sri Lanka?
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It is obviously due to the great incentives they are being offered by the B.O. I., which no other Agency or Authority in Sri Lanka has offered as a package deal. The B.O.I, has demonstrated from its inception that all these incentives and concessions offered to the enterprises who set up business establishments and undertakings firstly in the G.C.E.C. and now in B.O.I, are given all such promised and guaranteed incentives and concessions from the commencement of the Export Processing Zones. The granting of all these concessions without any hindrance or obstacle to the foreign and local investors has enhanced the credibility of B.O.I, and has resulted in the influx of foreign investors in and outside E.P.Z with B.O.I, approval.
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The incentives and concessions depend mainly on the type of the Project proposed.
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Normally incentives that are approved by B.O.I, include :-
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1. Tax Holidays ranging from 5-15 years from the firs profit making year
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2. Concessionary Tax or Tax credits as the case may be, after the expiry of the Tax Holiday
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3. Exemption of tax on payment of dividends, royalties etc
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4. Duty free imports of plant, machinery, raw materials and other Project related goods
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5. Duty free exports: especially duty free cars
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6. Free repatriation of dividends, profit etc
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7. Free transferability of shares
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8. Double taxation relief – Sri Lanka has signed Agreements with 30 Countries. These include all major investor countries:
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9. The right to 100 per cent foreign ownership
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INVESTMENT PROTECTION GUARANTEES OFFERED BY B.O.I.
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In this context when one looks at the Constitution of Sri Lanka special mention should be made to the provision in the Constitution to provide security to foreign investment by way of guarantees – vide Article 157 of the Constitution. Sri Lanka has also as a signatory to MIGA and ICSID provides the foreign investor guarantee and security of investment, in addition it should be noted that the Sri Lanka Government has signed bilateral Investment Guarantee Agreements with 16 countries including Belgium, China, Denmark, France, Germany, Japan, Korea, Luxemburg, the Netherlands, Norway, Romania, Singapore, Sweden, Switzerland, United Kingdom, and USA. These Agreements provide for :-
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(i) Protection against nationalisation and expropriation other than for public purpose
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(ii) Prompt and adequate compensation in the event of any nationalisation or expropriation
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(iii) Free transfer of capital, profit and business fees
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(iv) Settlement of Investment disputes under the International Convention for the Settlement of Investment Disputes (ICSID)
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(v) National treatment and Most-Favoured-Nation treatment
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Sri Lankan Government has decided and the B.O.I, welcomes investment in special sectors which they call ‘TARGET SECTORS”. Although the Investments are welcome in almost all sectors special emphasis is given to the below-mentioned sectors :-
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1) Textiles, Garments and Ancillary Products
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3) IT, Electronic & the Computer Software Industry
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4) Agricultural and Farm Produces:
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7) Infrastructure Development
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8) Tourism & Tourism related activities
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9) Export Trading & Warehousing.
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“ONE STOP SHOP SERVICES FOR INVESTORS”
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Today the B.O.I. acts as a “ONE STOP SHOP” services centre for the investor providing advice and assistance at every stage of the investment process. Further, it has become the one and only organisation known in Sri Lanka which any investor would like to contact to get the assistance of several services that are needed for the Investment in the E.P.Z. Zones and outside.
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“ONE STOP SHOP” concept assumed even greater importance with President Premadasa’s declaration of the entire Island as a Zone for Investment, the establishment of 300 new garment factories throughout the country on his directive, the designation of the last decade of the Century as Sri Lanka’s decade of exports, and similar initiatives to give more impetus to the process of industrialisation. Today in this process B.O.I, is not only geared to assist the foreign investors, but also the local investors who are engaged in export oriented industries, infrastructure development and especially those who are willing to invest in rural areas in sectors like garments, agro-based industries, and tourism.
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It can be said finally that on a review of the activities of and the contribution made by B.O.I. to development efforts in Sri Lanka, B.O.I, has achieved excellent results in the areas of job creation, investments and exports. The Projects done in each of the three Export Processing Zones and outside can be illustrated as follows:-
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CABINET SUB-COMMITTEE ON INVESTMENT
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It is to the great advantage of the B.O.I, that these Export Processing Zones and B.O.I, of Sri Lanka were directly functioning under the President of Sri Lanka. To expedite the investment process and to eliminate administrative and procedural bottle necks a Cabinet Sub-Committee on investment was established in October 1990. This ‘ Sub-Committee is always chaired by the Prime Minister and comprises of several Cabinet Ministers, Secretaries of Ministries, Heads of Government Departments, Private Sector Representatives, and B.O.I. Officials. The Committee Meetings are generally held once a week to discuss the issues relating to and problems encountered in Investment Projects. This Committee has so far contributed meaningfully and can be called as a Committee which spells out the success of the B.O.I.
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Further, it can be stated that to facilitate development in presently under-developed areas in the country, B.O.I. has identified 200 areas to promote investment; and special incentives are offered to projects in these areas to undertake non-traditional exports. As regards these areas and projects investment criteria has been proposed by B.O.I. The Investment criteria is as follows:-
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PROJECTS THAT ARE 100 PER CENT LOCAL, 100 PER CENT FOREIGN USED, OR JOINT VENTURE WHICH :
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2) Are located within 200 identified locations in the Provinces/Pradeshiya Sabha Areas
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3) Have commenced Business between 1st October 1991 and 31st December 1993
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4) Export 70 per cent of products in the case of Agro-base, Aqua Culture, or Animal Husbandry
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5) Export not less than 90 per cent of the output in the case of other non-traditional products
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6) Either have a maximum capital investment of Rs.10 Million or employ not less than 500 Workers.
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In this context special mention also should be made of efforts B.O.I, has made to propagate and facilitate the Government’s programme to establish 200 garment manufacturing units in designated Provincial areas. This programme of 200 garment factories is designed to provide opportunities to the people in normal areas to enter the main stream of organised commercial activity by creating direct employment to One hundred thousand (100,000) in addition to a large number of indirect jobs.
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At this point of time, it is noted by the writer that well over 135 garment factories of the 200 factories have been established and have commenced business. The incentives offered by B.O.I, in the investment done under B.O.I, blessings and approval in the three export processing Zones and outside have attracted many investors. Incentives offered vary from project to project and the type of the project. The benefits, such as, exemption from Corporate Income Tax (Tax Holiday) upto a maximum 15 years, Duty free imports of luxury cars and project related articles, exemption from Import and Export Control Act, right to maintain Foreign Currency – Banking Accounts during the lifetime of the Enterprise, exemption from Income Tax on Dividends paid to Shareholders, exemption from Customs Duties in respect of import of plant, machinery, equipment and raw materials.
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These are few of the incentives and privileges that are being granted to Enterprises under B.O.I., and these centres contribute greatly to the success of the B.O.I, in Sri Lanka and thereby spell out the policies of free market which has protected foreign investment and the creation of employment through Export Processing Zones,
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APPLICABILITY OF LABOUR LAWS, AND LABOUR STANDARDS AND RELATIONS
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The B.O.I, of Sri Lanka will oversee the industrial relations situation in the enterprises coming under its purview and enterprises are expected to maintain a healthy labour relations situation.
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The Labour Laws of the Country are applicable in these enterprises. Further it is a requirement in the Free Trade Zone Enterprises to have a written contract of employment embodying terms and conditions of services including the designation or category of the employee, normal hours of work, rate of pay, period of training, if any, probationary period, leave, holidays, and superannuation contributions which has to be issued to every worker, and acknowledgment of the receipt obtained by the employer.
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Generally a normal working day is divided in to one shift of 8 hours, and half day of 5 1/2 working hours. Normal 1 hour for meal or rest has to be provided. In the Free Trade Zone there are no restrictions of employment of male workers on night shift. But employment of female workers on the night from 10 p.m. to 6 a.m. on the following day will be allowed on a 3rd shift, subject to several conditions that are laid down by the B.O.I.
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The principle behind this is that females can be employed even on the night shift from 10 p.m. to 6 a.m. in an Enterprise under purview of the B.O.I. It is operative even today in the Enterprises of B.O.I.
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The basic rules of conduct on disciplinary matters shall be observed by the Enterprise, and super-annuation benefits, health and welfare facilities, industrial safety, industrial injury benefits etc have to be provided in the Enterprise of the B.O.I.
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Further as regards the disciplinary procedure, the B.O.I. Labour Standards state as follows :-
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” An Employer can terminate the services of any Employee on disciplinary grounds (e.g. misconduct, fraud, refusal to carry out lawful orders) provided the normal disciplinary procedure has been followed. For wrongful termination of services the employee can seek redress in the Labour Tribunal before the expiry of 6 months from the date of such termination”.
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The B. 0.I. generally allows an Enterprise to operate in the B.O.I., E.P. Zones and approved B.O.I. Enterprises; only if the B.O.I, of Sri Lanka on one hand and the Enterprise or the Company on the other hand enter into an Agreement. In the aforesaid Agreement which is signed by B.O.I, and the Enterprise, the B.O.I, has laid down in Clauses 7 and 8 thereof that the following conditions should be adhered to by every Enterprise in the B.O.I.
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“(7) The Enterprise shall employ for the purpose of the said business only persons who are citizens of Sri Lanka. Provided however, that the Enterprise may with the prior written consent of the Board employ foreign nationals whom the Enterprise considers necessary and indispensable for the proper and efficient functioning of the said business
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8. (a) The Enterprise shall offer to all employees who are citizens of Sri Lanka such terms and conditions of service as are not less favourable from the minimum terms and conditions of services as may be prescribed by the Board from time to time relating to wages, hours of work, overtime, leave, Provident Fund, Welfare Facilities, Safety Precautions, and Workmen’s Compensation
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(b) The Board in prescribing the said minimum terms and conditions of service shall have regard to the practices, rules, Collective Agreements, and terms and conditions of service applicable to Employees in comparable categories in the Private Sector:
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(c) The Enterprise shall refer to the Board any Industrial Dispute between the Enterprise and its employees for settlement by the Board by Conciliation or Arbitration.”
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By the aforesaid two clauses the B.O.I, has tried to prevail upon the employer to follow the Labour Standards laid down and also the Labour Laws prevailing in the country. As a peculiar feature in B.O.I. Enterprises the B.O.I. has called upon every Enterprise to establish a JOINT CONSULTATIVE COUNCIL and such Council which consists of an equal number of representatives elected by the workers and nominated by the management. The Chief Executive or his nominee shall be the Chairman. Such Council should meet once a month and discuss matters of concern to both the workers and management.
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Although the Trade Union rights and privileges can be enjoyed by the employees and there is no bar for the same, in the Export Promotion Zones, namely, Katunayake, Biyagama, Koggala, the Trade Unions are not allowed to function within the Zones as it is by practice Trade union leaders are not allowed or given permission to enter these Zones as the entry to the Zone by any outsider is with permission and with legal authority. In practice we have seen that no Union leaders are given permission to enter these Zones, Thereby Trade Union activities are barred in projects within and inside the Zones, and that is why B.O.I, has promoted and established JOINT CONSULTATIVE COUNCILS.
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