10 - The Regulation of Foreign Investments in Sri Lanka

Summary

Sri Lanka’s adoption of an open economy in the late 1970s led to it hosting foreign investment projects, regulated by investment treaties. However, decades of civil strife and more recently, competition from regional neighbours, have resulted in the dividends of foreign investment being much lower than originally anticipated. In addition, negative experiences in dispute resolution fora found the state paying compensatory sums that often far outweighed the projected benefits of the investment. Its once prized strategic location has become a double-edged sword, as regional superpowers vie for investment opportunities that yield security benefits in the Indian Ocean rather than other investment needed by Sri Lanka.Against this backdrop, this chapter analyses the Sri Lankan experience of foreign investment by assessing the political background to foreign investment and associated legal developments and the state’s treatment of investors, including via dispute resolution. Using examples from comparative jurisdictions, it assesses policy and legal measures that could enable Sri Lanka to be seen as a worthwhile commercial prospect by diverse actors, and not only as a strategic move by regional powers. The authors argue in favour of shifting from a ‘leader-driven’ model to a more holistic and rules-based approach, and outline a multi-step plan of appropriate political and legal measures.