Sri Lanka Brief
NewsUS Embassy Cables – Colombo – 2010 – 01 to 05

US Embassy Cables – Colombo – 2010 – 01 to 05

by

Here’s the first five for 2010. Mostly about the 2010 Presidential election and economic issues in Kandy and the east.

Contains such gems as…

“chief opposition campaign strategist and one-time Rajapaksa confidante Mangala Samaraweera said he was “pleasantly surprised” that General Fonseka believed accountability was important for Sri Lanka”

“noting that he knew Mahinda Rajapaksa intimately and would not put it past him to facilitate an assassination attempt on Fonseka if the campaign increasingly went in the general’s favor.”

“We assume that at least some of Samaraweera’s claims about Fonseka’s “liberalism” are exaggerated and meant to impress us. Nevertheless, the general and his agents are making promises that it would be hard for them to walk back.”

“[Harsha] De Silva said that ‘as an economist’ he understood that the government of Sri Lanka needed to institute many economic reforms, but for campaign purposes the opposition needed to back away from the ‘neo liberal’ reforms attached to the UNP.”

“The UNP party is playing a dangerous game supporting General Fonseka, because the Sri Lankan Presidency is very powerful, and it is unclear what economic policies Fonseka would support as President.”

Reference ID
Created
Classification
10COLOMBO2
2010-01-04 11:39
CONFIDENTIAL
10COLOMBO3
2010-01-04 11:48
UNCLASSIFIED
10COLOMBO7
2010-01-05 12:42
CONFIDENTIAL
10COLOMBO8
2010-01-06
CONFIDENTIAL
10COLOMBO10
2010-01-07 12:25
UNCLASSIFIED//FOR OFFICIAL USE ONLY

01 Opposition Presidential Candidate has little economic agenda; focuses on corruption.

The Candidate Has Little Economic Experience
Irreconcilable Differences Between the Opposition Parties
Campaign Strategy Focuses on Corruption and Government Waste

TNA will support Fonseka
Fonseka in Jaffna
TMVP Still In Play?
Crossovers to Opposition
Death of UPF’s Chandrasekaran
Violence Between Rajapaksa and Fonseka Supporters
Elections Commissioner Takes Firm Action — At Least Once
Police Ordered to Support Rajapaksa?
Rajapaksa’s brain abandons him
Campaign violence, Fonseka Security biggest worries
If Fonseka Won
Reconciliation and Accountability
Background on the Eastern Province
Impediments to Increased Economic Development
Strong Ethnic Tension
Reference ID
Created
Classification
10COLOMBO2
2010-01-04 11:39
CONFIDENTIAL

REF:
COLOMBO 1145
Classified By: A/DCM Rebecca Cohn for Reasons 1.4 (B.D)
1.     (C) Summary.
The opposition presidential candidate General Fonseka is a military man who has publicly admitted that he has little knowledge of economic issues, and other than clamping down on corruption, he has no apparent economic program. General Fonseka has announced some populist measures to increase government employee salaries and increase public pensions. It will be extremely difficult for him to advance a coherent economic policy because the opposition parties supporting him have diametrically opposed economic views.  Instead, Fonseka plans to focus on corruption, where President Rajapaksa is weak, and blaming corruption and government waste for the voters, tough economic times. While the economy is a high-priority for many voters, both campaigns have focused on personalities and and past performance rather than on a solid economic and political platform for the future. End Summary.

The Candidate Has Little Economic Experience
2.    (C)  General Fonseka is a military man who has little experience with economics or even any readily apparent views on economic issues. Fonseka has admitted publicly that he does not have any economic experience, and he has made few public statements about the economy. He has promised to increase the monthly salary of public servants by 10,000 rupees or approximately $ 90 USD per month (there are 1.2 million government employees). Fonseka also supports providing 2,000 rupee monthly pensions to senior citizens (about $18 USD). Econoff met with opposition campaign strategist and economist Harsha de Silva, who said that Fonseka plans to promise benefits to each economic segment of the population in order to gain votes. Fonseka himself, however, prefers not to discuss future economic plans. Parliament opposition leader and potential future prime minister under a President Fonseka, Ranil Wickramesinghe, and his wife had a private lunch with the DCM and Poloff.  At the lunch, his wife reminded Wickramesinghe that he and Fonseka should say something about the economy, but he demurred because the political parties backing Fonseka’s candidacy (primarily the liberal UNP and the leftist JVP) had completely different economic policies.

Irreconcilable Differences Between the Opposition Parties

3.    (C) General Fonseka is a common candidate supported by the free market UNP and the far left JVP.  The UNP has supported privatization of state industries, an open economy and an increased role for the private sector. The JVP is at the opposite end of the economic spectrum, has opposed privatization and UNP reforms in the past, supports a large role of the state, opposes foreign investment, and advocates for government welfare to protect society. De Silva, who is a prominent opposition economist, said that he was in charge of writing Fonseka’s economic manifesto for his possible administration, but it was an impossible task because the UNP and JVP are diametrically opposed.  Instead of a positive economic agenda, De Silva recommended attacking President Rajapaksa for corruption and government waste.

Campaign Strategy Focuses on Corruption and Government Waste
4.    (C)  De Silva conducted a poll on behalf of the opposition which found that the Sri Lankan people were very upset about the cost of living, their declining ability to support their families, and corruption and government waste. The poll also found that there was a split between support for the GSL,s nationalist state-led policies and the UNP,s international trade private sector-led economic policies. The government UPFA coalition and the UNP are seen as equally capable of improving their personal economic situation.

5.    (C) De Silva recommended that Fonseka criticize President Rajapaksa on government waste and corruption issues and blame corruption for the high cost of living and the difficult economic situation faced by many Sri Lankans. The corruption issue is a good one because while Fonseka is seen as clean, even the President’s private polling shows 80% of the people think that President Rajapaksa and his family are corrupt (see reftel).  De Silva plans to use a study, produced by a prominent economist, that corruption costs Sri Lanka 2% in annual GDP growth. The opposition will try to tie President Rajapaksa’s alleged corruption to the rising cost of living and falling income for many Sri Lankans.

6.    (C) De Silva candidly admitted to econoff that the attack on corruption is primarily a campaign strategy. De Silva said that ‘as an economist’ he understood that the government of Sri Lanka needed to institute many economic reforms, but for campaign purposes the opposition needed to back away from the ‘neo liberal’ reforms attached to the UNP.  After the election, De Silva hoped that the UNP would take command of economic policy and apply a toned-down version of its traditional policies.
7.    (C) Comment.
The UNP party is playing a dangerous game supporting General Fonseka, because the Sri Lankan Presidency is very powerful, and it is unclear what economic policies Fonseka would support as President. The opposition focus on corruption indicates that it believes that neo-liberal reforms, such as privatization, are too toxic to publicly advocate. Sri Lanka,s economy  could indeed benefit from both a good crusade against corruption and liberal reforms. End Comment.

BUTENIS


Reference ID
Created
Classification
10COLOMBO3
2010-01-04 11:48
UNCLASSIFIED
SUBJECT: ECONOMIC DIFFICULTIES IN SRI LANKA‘S CENTRAL PROVINCE

REF: COLOMBO 02

1. SUMMARY:
Sri Lanka’s mountainous Central Province includes the country’s second largest city, the majority of the tea-planting region, and a sizeable number of foreign investment and export-oriented industries.  Unfortunately the province’s economy is struggling under the weight of the global economic downturn, the high cost of borrowing money, a reduction in foreign investment, and the government’s development focus on the war-torn North and East.  Business people and Chamber of Commerce contacts emphasized their hopes that the economy will be the prime focus in the upcoming Presidential election (reftel) and that an economic “peace dividend” will eventually benefit the region.  END SUMMARY.

2. Kandy, Sri Lanka’s historic capital, is the country’s second largest city and is the capital of the Central Province, a region which takes in much of the hill country (rising to 6000 feet) with its verdant tea plantations, vegetable farms, and country villages. The Central Province (CP) covers nearly 2200 square miles and has a population of 2.6 million people. Its 2008 GDP was $4.0 billion and its per capita income was $1535/year — slightly below the national average of $2014/year. The CP produces shoes, baked goods, furniture, and vegetables for local consumption; and tea and some textiles for foreign markets. Tourism is also an important driver of economic activity.

3. Unfortunately, the economic situation in the region has slowly deteriorated over the past five years. After a spurt of central government interest and directed investment which began 15 years ago, the government’s focus slowly shifted first toward winning the war against the Tamil Tigers and more recently on rebuilding the affected northern and eastern regions of the country. In the past year, the global financial crisis has also taken its toll, particularly on the export-oriented textile industries located in the province. According to one textile producer, nearly 50 percent of the CP’s moderate number of textile companies closed their doors in the past year, and others dramatically reduced their number of employees (also likely to be compounded should the EU’s GSP-Plus tariff-reduction benefit for textiles end this summer). And while tea prices are fetching record prices, the value of those sales is registered in the Western Province where Colombo’s tea auctions occur and therefore is not reflected as part of the CP’s economic activities. The actual plantations, on the other hand, suffer with some of the country’s highest levels of poverty, further dragging down the Province’s per capita income.
4. The biggest complaint heard, however, was the lack of monetary circulation and difficulty in obtaining a bank loan for a reasonable interest rate.  (NOTE: This is an island-wide complaint.  END NOTE.)  Loan rates are often as high as 20 percent and even state-run banks (which were recently forced to lower rates below market) employ various means to deny those lower rates to your average small business owner. Mr. Anuruddha Warnakula, President of the Central Province Chamber of Commerce, also noted a decided lack of confidence in the central government’s economic policy. He noted how new taxes have hindered growth and lamented the fact that the government ended its support in 2006 for the successful business incubator located outside Kandy.  The Board of Investment’s targeted tax exemption for the region (begun in 1994) was ended under the Rajapaksa administration in 2004, leading to further stagnation. Warnakula also described the central government’s Export Development Board field office in Kandy as “useless” and lamented the decided lack of entrepreneurship in the region.
5. COMMENT: While both candidates for January’s presidential election are talking about economic issues, neither candidate has developed a clear and believable economic platform to improve the CP’s situation. While the prospects of rapid peace-time development in the CP remain unclear — particularly if the North and East continue to receive the bulk of national and international investment and development assistance — the fundamentals for the province remain good. Labor costs are low, transportation times to the port are quick, and tourism growth continues.  As the global recession ends, the CP’s economy should once again expand as a peaceful Sri Lanka finally focuses on issues other than the war.  END COMMENT.

BUTENIS

Reference ID
Created
Classification
10COLOMBO7
2010-01-05 12:42
CONFIDENTIAL
SUBJECT: SRI LANKA: ELECTIONS UPDATE NO.4

REF:
A. 2009 COLOMBO 1152
B. 2009 COLOMBO 1145
C. 2009 COLOMBO 1139
Classified By: AMBASSADOR PATRICIA A. BUTENIS.  REASONS: 1.4 (B, D) 

TNA will support Fonseka

1. (C) As reported by Post in an O/I item on December 24, the TNA is expected to announce shortly that it will support Fonseka in the presidential election, with widespread local media coverage already discussing the move. TNA leader Sampanthan is scheduled to meet with Ambassador Wednesday or Thursday to outline the details of a so-called “Fonseka Programme,” which is said to entail a three-page plan of how Fonseka intends to deal with the former war zone in the North.  He reportedly also pledged to end the state of emergency, release within a month of taking office any Tamil detainees not formally charged with crimes, and dismantle the high security zones scattered throughout the country — the latter a particularly acute point of contention among some Tamil landowners and more pressing now that many recently released IDPs hope to return to their original property. Post heard complaints from at least one TNA Member of Parliament (MP) that this decision had been made by Sampanthan and one or two other top party leaders without adequately consulting other MPs in the party. It would surprise Post to see an open rebellion by any significant number of TNA MPs against this decision, but the TNA leadership may have to work very hard in the next three weeks to convince voters in the North that voting at all will bring any appreciable change to their day-to-day lives.

Fonseka in Jaffna

2. (C) General Fonseka made a campaign visit to Jaffna on Saturday, January 2, along with a number of his UNF coalition members including Ranil Wickremesinghe of the UNP, Mano Ganesan of the Western People’s Front, and Samaraweera Amarasinghe, leader of the JVP. While there, he officially opened a campaign office, held a press conference, and met with the local Catholic bishop, Hindu leaders, and Jaffna University officials.  He promised to transform the local Palaly Airport into an international airport and said he would provide details about all LTTE ex-combatants currently held in detention.  Fonseka also participated in a meeting organized by Ganesan, with the family members of a number of disappeared individuals.
TMVP Still In Play?
3. (C) Reports diverged on whether the TMVP — until now a pro-government Tamil group — might throw its support solidly behind one candidate or another.  After a number of mixed signals from TMVP leader Pillayan and his deputies, media reported on January 4 that the UNP had appointed a special emissary to try to convince the TMVP to back Fonseka.  That was followed up on January 5 by UNP General Secretary Tissa Attanayaka claiming that several top TMVP figures were prepared to switch their support to Fonseka but had been threatened by the government.  The rumor mill in Colombo was claiming that Pillayan had received a payment of USD 200,000 to 300,000 from the government to ensure he and his party supported Rajapaksa.

Crossovers to Opposition

4. (C) Two top members of the ethnic Tamil Ceylon Workers Congress (CWC), National Organizer Ramaiyan Yogarajan and Deputy Minister of Education Murugan Satchithanandan, announced on December 30 that they would leave the government and support Fonseka. An additional two deputy ministers from the Sri Lanka Muslim Congress also were reportedly planning to switch and support Fonseka. While leader of the SLMC Rauff Hakeem is already a Fonseka supporter, these two SLMC members had previously been with the government.

Death of UPF’s Chandrasekaran

5. (C) Further adding to the drama surrounding the various ethnic Tamil parties, Mr. P. Chandrasekaran, leader of the Up-Country People’s Front (UPF), died of a heart attack at age 52 on January 1. The UPF had a history of pragmatically supporting whichever side was in power and had made a statement prior to the campaign that it would support Rajapaksa in the campaign but would support Fonseka afterwards if he won. While Chandrasekaran’s wife was appointed as the party leader upon his death, it was likely that deputy head P. Radakrishnan would be making any major decisions, though few expected him to change sides and support Fonseka at this point.  The Colombo rumor mill was also running on this story, saying that prior to his death Chandrasekaran had offered to support Fonseka if he were given USD 1 million, but was turned down.

Violence Between Rajapaksa and Fonseka Supporters

6. (C) Violence broke out between supporters of the two main candidates on January 3 when supporters of Fonseka were distributing leaflets in Kiribathgoda. An unknown number of persons were injured by rocks. Media reports on January 5 reported the unusual move by President Rapajaksa of openly reprimanding Minister of Labor Mervyn Silva, an SLFP organizer, for his supposed role in the violence.

Elections Commissioner Takes Firm Action — At Least Once
7. (C) The Inspector General of Police ordered the transfer of a police superintendent in Ampara who had complied with Elections Commissioner Dissanayake’s directive to remove illegal campaign signs. EC Dissanayake ordered on January 1 that the transfer be canceled, however, and reiterated his directive that transfers of public servants were not allowed during the election campaign.

Police Ordered to Support Rajapaksa?

8. (C) Newspapers on January 3 reported that a flyer was being distributed among police officers, which requested that they “dedicate themselves to the victory of President Rajapaksa,” and which appeared to bear the official seal of the Special Task Force (STF) and the signatures of STF Commandant Sarathchandra and STF Senior Superintendent Ananda Gunatilleke. STF officials, including Gunatilleke, denied any responsibility and suggested the flyer was faked.
BUTENIS
Reference ID
Created
Classification
10COLOMBO8
2010-01-06
CONFIDENTIAL

SUBJECT: CAMPAIGN STRATEGIST SAYS FONSEKA WANTS TRUTH AND RECONCILIATION COMMISSION

Classified By: AMBASSADOR PATRICIA A. BUTENIS.  REASONS: 1.4 (B, D)

1. (C) SUMMARY:
In a meeting with Ambassador, chief opposition campaign strategist and one-time Rajapaksa confidante Mangala Samaraweera said he was “pleasantly surprised” that General Fonseka believed accountability was important for Sri Lanka, that he agreed with Samaraweera that the country needed a truth and reconciliation process, and that he had ordered the campaign to start working out the logistics of a truth and reconciliation commission. Samaraweera was “increasingly optimistic” about the Fonseka campaign, noting opposition polls showing the general’s numbers increasing from 43 percent just after nomination in mid-December to 52 percent now. But Samaraweera was worried about rising violence of pro-government thugs and suggested the president was not above ordering Fonseka’s assassination or even wounding himself to gain public sympathy. If Fonseka won, the general had made clear he wanted to remain chairman of the Security Council and wanted to oversee the re-organization of the armed forces. Samaraweera was not concerned about the general reneging on his promises about abolition of the executive presidency and establishing a military dictatorship.  Indeed, Samaraweera argued it was the Fonseka campaign that had brought questions of democracy and minority rights to the center of the presidential race, supplanting the war triumphalism and budding “national socialism” of the Rajapaksas.  END SUMMARY.

RAJAPAKSA’S BRAIN ABANDONS HIM
2. (C) If General Fonseka was the heart of the Sri Lankan war effort that “betrayed” the president, Mangala Samaraweera was the Rajapaksa campaign brain that also deserted him. Having a long history with the president’s SLFP, Samaraweera was a close confidante of President Chandrika Kumaratunga, the architect of Rajapaksa’s successful 2005 presidential campaign, and the GSL foreign minister during the first year and a half of the Rajapaksa government. He lost his position as FM to Bogollagama when the latter crossed over from the UNP, and Samaraweera soon broke with the Rajapaksas to form his own party, the SLFP (Mahajana Wing). Samaraweera is now the strategic architect of the campaign of joint opposition candidate Fonseka.

CAMPAIGN VIOLENCE, FONSEKA SECURITY BIGGEST WORRIES

3. (C) Samaraweera said he was “increasingly optimistic” about the Fonseka campaign, noting opposition polls showing the general’s numbers increasing from 43 percent just after nomination in mid-December to 52 percent now.  He claimed that polls by GSL domestic intelligence were similarly showing a 51-Fonseka/49 Rajapaksa breakdown. This was most surprising in the north and east, where the opposition had not expected to do so well. At the same time, however, Samaraweera said he was worried about campaign violence and intimidation — that is, attacks by pro-government thugs on opposition rallies and offices — which were quickly escalating, including in his home district of Mahara in the south.  He expected the situation to get worse as election day approached, though he thought the violence was back-firing on the Rajapaksas by turning people against them.

4. (C) He also expressed concern about Fonseka’s personal safety, noting that he knew Mahinda Rajapaksa intimately and would not put it past him to facilitate an assassination attempt on Fonseka if the campaign increasingly went in the general’s favor. Given Rajapaksa’s penchant for high drama and theatrics, he also thought the president was not above shooting himself then publishing photos of his wounds and blood to gain sympathy as a victim of alleged opposition violence. If these or other such scenarios led the opposition to believe the election was stolen, Samaraweera said they would object strongly and the JVP would likely take to the streets.  But he did not believe this reaction would push Sri Lanka to its own Orange Revolution, as in Ukraine. Sri Lankans were “too laid-back,” and the Buddhist belief in karma would make them accept even a stolen election as what was “meant to be.”

IF FONSEKA WON
5. (C) Samaraweera said that in the event of a Fonseka victory, the general would not be content to assume a figure-head role after the abolition of the executive presidency in line with opposition campaign promises. He had made clear that he wanted to remain chairman of the Security Council and wanted to oversee the re-organization of the armed forces. Samaraweera said he was not concerned, however, about the general reneging on his promises about abolition of the executive presidency and establishing a military dictatorship once in office. The UNP and JVP already had been working hard against the Rajapaksa dictatorship, and the whole thrust of the Fonseka campaign was against the “national socialism” that raised its ugly head at the end of the war.  Samaraweera claimed that Fonseka was chosen by the opposition as one of the original war icons purposefully to arrest this development and, indeed, the campaign had brought questions of democracy and minority rights to the center of the presidential race, supplanting the war triumphalism the Rajapaksas preferred.

RECONCILIATION AND ACCOUNTABILITY
6. (C) Samaraweera had no faith in the Rajapaksas to address meaningfully the questions of national reconciliation and accountability, despite their great importance for the health and future of Sri Lanka. Mahinda Rajapaksa was “not so bad,” but his family (that is, brothers Gotabhaya and Basil) had made him a prisoner of the worst racist and chauvinist elements in society. Mahinda himself also was firmly opposed to any devolution of power and had argued in closed government meetings that he wanted Sri Lanka to be a “unitary” not just a “united” country.

7. (C) Fonseka, on the other hand, had made reconciliation and accountability centerpieces of his campaign. Samaraweera noted the 10-point plan the general had just signed with the TNA leader Sampanthan on political rights and economic re-development of the war-affected areas.  He also said Fonseka had been “surprising me with his liberalism” and noted that the general himself had come up with the idea of ensuring freedom of religious belief under a new regime. On the very sensitive issue of accountability, Samaraweera again said he was “pleasantly surprised” that Fonseka believed accountability was important for Sri Lanka, agreed with Samaraweera that the country needed a truth and reconciliation process, like the South Africans, and had ordered the campaign to start working out the logistics of a truth and reconciliation commission. Samaraweera thought that if Fonseka won, the Rajapaksas would be marginalized in the SLFP and the SLFP mainstream would want to work with the new government on reconciliation and accountability.

COMMENT
8. (C) Mangala Samaraweera’s defection to the opposition is old news, but it is only now that it is probably causing the greatest heartburn for the Rajapaksas. With his intimate knowledge of Mahinda Rajapaksa’s thinking and methods, Samaraweera is as much of a danger to them in the presidential campaign as “traitor” General Fonseka. The key to this appears to be Rajapaksa’s rigidity and fear of alienating his base. While known as a masterful campaigner and the king of divide and conquer, Rajapaksa has offered no new significant initiatives during the campaign and has done little to reach out to Tamils other than to kiss their babies. Fonseka, on the other hand — presumably under the guidance of Samaraweera and Ranil Wickramasinghe — has re-invented
himself, dramatically reached out to the minorities, and promised great reforms for Sri Lanka.
9. (C) We assume that at least some of Samaraweera’s claims about Fonseka’s “liberalism” are
exaggerated and meant to impress us. Nevertheless, the general and his agents are making promises that it would be hard for them to walk back. The 10-point program signed with TNA leader Sampanthan would radically alter the government’s relationship with Tamils and would represent a major step toward national reconciliation. Similarly, their telling us about their plans for a truth and reconciliation commission — though not announced publicly — puts them on the hook with the international community.  The next few weeks will tell whether this strategy is a winner, but in the meantime it has breathed new life into Sri Lankan politics and brought issues to the fore that had been all but buried.
BUTENIS


Reference ID
Created
Classification
10COLOMBO10
2010-01-07 12:25
UNCLASSIFIED//FOR OFFICIAL USE ONLY
1.     (SBU) Summary.
The Government of Sri Lanka (GSL) touts the ‘economic success’ in Eastern Sri Lanka, where the fighting ended in 2007, as its blueprint for the reconstruction of Northern Sri Lanka. Econoff found that the base economy in the East of paddy rice farming and fishing has bounced back, the GSL has improved the road network, and the number of security checkpoints has been reduced. Two new apparel factories have been established, albeit with heavy subsidies, and there is tourism development potential. However, the GSL has not been effective in overcoming other impediments to economic development. Most strikingly, there is local resentment that large Sinhalese companies from Colombo are receiving the prime tourist plots and government contracts to the exclusion of local entrepreneurs. End Summary.

Background on the Eastern Province

2.    (U)  Econoff visited two of the three districts in the Eastern Province, Batticaloa and Trincomalee. Batticaloa is almost entirely agricultural with little or no industry. A local business leader estimated that the Batticaloa population is 80% Tamil and 20% Muslim with almost no Sinhalese Buddhists. Trincomalee has paddy rice production and fishing, but also possesses the world’s second largest natural harbor and several industries. The population of Trincomalee is almost evenly split between Tamils, Muslims and Buddhists. Basic Agricultural and Fishing Economy Bounces Back
3.    (U) Agricultural rice production and the fishing industry have quickly bounced back in both Batticaloa and Trincomalee. The Government Agent in Batticaloa described how paddy rice production has more than doubled since the end of the war in 2007, increasing from 25,000 hectares in 2007 to 58,000 hectares in 2009. Moreover, the fish catch rose from 10,000 metric tons in 2007 to 17,000 metric tons in 2009. The dramatic increases in paddy production and fish catch were confirmed by business and NGO contacts. The pattern is the same in Trincomalee, where paddy rice cultivation has increased from 150,000 hectares in 2007 to 200,000 hectares in 2008 and 227,000 hectares in 2009. Similarly, the fish catch has also increased sharply.  A government aligned academic stated that the GDP had risen 16% in the East as abandoned land has been put back into production.
4.    (SBU) All of the local contacts, from government officials to business leaders to NGOs, agreed that the GSL has substantially improved the road system in the Eastern Province. Much of the road improvements have been funded with Tsunami resources from donors. The road system still is not complete; the primary roads in Trincomalee were new but the roads in Batticaloa were in worse shape. The GSL has also improved the rural roads, but they are still below the national roads in the East. The improved roads have brought real benefits in terms of reduced agricultural spoilage during transportation (40% of the crops was lost before), and better roads for tourists. There still are problems. There were heavy rains during econoff’s trip, and some bridges were un-passable and some people were cut off in a remote area.
5.    (SBU) Although there are still many checkpoints, there are fewer than before, so security checkpoints no longer appear to be a major drag on commerce. USAID’s office on Connecting Regional Economies (CORE) conducted a study of logistics in the East, and  found that security checkpoints were a major impediment to trade before the end of the Tamil Tiger war in May 2009.  At that time trucks went through multiple checkpoints where they frequently needed to unload their cargo, taking hours at each checkpoint and sometimes damaging the cargo. There have been dramatic improvements, with many fewer checkpoints, and drivers are stopped only if they do not have proper documentation. Econoff observed many checkpoints, but almost all cars and trucks were lazily waved through, and usually the checkpoint was empty. Our contacts did state that there are still some roads which are off limits to civilians, and security around key areas, such as the port or government officials, remains tight. Tourism is the Sector with the Most Near-Term Potential.

6.    (SBU) Although the East has world class beaches and other tourist attractions, so far only domestic tourists are visiting Eastern Sri Lankan, and long term growth will depend on greatly improved tourist facilities. According to the CORE study sponsored by USAID, the East Coast only has eight ‘graded’ hotel establishments, with 230 beds. The occupancy rate in these hotels was 22% in 2008, but this has increased so much in Trincomalee (due to domestic tourism) that it can be hard to get a room in one of the few decent hotels there. The accommodations in Batticaloa are well below international standards, and members of the Batticaloa Chamber of Commerce said that travelers usually do not stop there but stay in neighboring districts. The growth in International tourism would be aided by a large airport, but the Trincomalee airport only has a couple of flights per week.  Tourists must take a day long trip each way from Colombo in order to visit.

7.    (SBU) As part of the GSL,s goal to increase tourist arrivals from 500,000 per year to 2,500,000 by 2016, the GSL is allocating land for tourist development in Trincomalee. Our contacts agreed that all or almost all of the prime tourist land was being allocated by the government to Colombo (Sinhalese) firms, and local companies were being shut out. The Government Agent for Trincomalee (appointed by President Rajapaksa and in charge of the area) said that he allocated land based on factors such as capacity to develop international hotels, financing, experience and environmental considerations. The government agent, Major General de Silva, added that the local companies simply do not have the capacity to build a large international hotel.  Members of the Trincomalee Chamber of Commerce implicitly agree, by arguing that the government needed to provide them with bank loans and allow them to build small hotels or guest houses. Other contacts alleged that the prime tourist land was distributed by the GSL based on favoritism. In any case, although Colombo firms have taken the land, they have not begun work, but they are waiting until after the upcoming elections season to begin investing. The CORE study projects that if hotel construction begins in the next two years, it will be up to five years until the hotels are open and operational. Progress in Batticaloa is much further behind, as the local business leaders are discussing building a single three star hotel to house business travelers.
8.     (SBU) The port of Trincomalee is the second largest natural harbor in the world (after Rotterdam), but it has not served as a catalyst for regional development. The Trincomalee  Port has three large companies: Prima Wheat Mill, Indian Oil Company and Toyota Cement, and each company has a private dock to import their industrial inputs. The main dock is little used aside from some shipments of coal. The port director has big plans to create a dry dock for repairing ships and gaining some of the regional transshipment trade.  None of our other business or government contacts foresee any major development of the Trincomalee Port, other than an Indian-financed coal power plant. According to a CORE study, the Port of Trincomalee receives 4% of the Sri Lankan import cargoes, measured by weight. Econoff met with GSL officials in Colombo, who have great plans to expand the Port of Colombo (currently receiving 95% of Sri Lanka’s cargo) and to build an enormous port in President Rajapaksa’s home region of Hambantota in the South, but few plans are underway to expand the Port of Trincomalee.
9.    (SBU) The GSL plans to expand Trincomalee’s industrial base are having limited success.  Sri Lanka is not keeping their present industrial base happy. The Prima Wheat mill has plans to expand, but it has been unable to do so for two years because they have not received the required 13 permits. Indian Oil is also frustrated that the government prevents it from importing more oil and opening more service stations, since the Indian Oil service stations compete with the government gas stations. When asked about the Trincomalee business climate, one business leader said that he would not recommend investing in Trincomalee because there is too much red tape and the wage costs are increasing. The GSL established an export processing zone near Trincomalee, but despite constructing several buildings they have been unable to lure any companies to the EPZ.   Even the successes create problems. The GSL has an agreement to build an Indian-financed coal plant in the Port of Trincomalee, but to clear the necessary land the GSL has relocated  2,000 people from their land to new government allocated land, which has generated complaints.  There are two apparel factories in the East, Brandix and TriStar. Econoff visited Brandix, established by a large Colombo company with the laudatory goal of bring together workers from the Sinhalese, Tamil and Muslim communities. The GSL has provided heavy subsidies through a five year income tax holiday for the entire company to the Brandix factory. USAID in a public/private partnership is financing training for the 600 local workers from all three ethnic communities, many of whom are war widows, former combatants, or women from Internally Displaced Persons camps.  Brandix even requires the work teams to eat lunch together, or else the different ethnic groups would self segregate for lunch. The Brandix factory is not yet profitable, however, as there has been heavy turnover of 30-40% (Muslim girls in particular quit due to family pressure), and Brandix must work on soft work skills with their employees, such as the importance of coming to work on time every day. Econoff visited the factory, which was short staffed due to a threat of poor weather, and observed a good portion of the workers chatting rather than industriously sewing clothes.  Econoff was also told that the TriStar factory receives heavy subsidies, although it was not clear if these were more than the five year tax holiday.
Impediments to Increased Economic Development
10.   (SBU)  Land issues are a major problem in the East.The local government has a difficult time determining land title, since the LTTE controlled certain areas for years and people who were forcibly evicted from their lands are coming back and demanding their land. The Government Agent of Batticaloa stated that land title is an enormous headache. In urban areas the title owners may have left 20-30 years ago, then other people have lived in the houses and improved them, or bought and sold them. The government experiences the same problem in Trincomalee, and there the GSL gives the returnees new land instead of their original plots. The situation in the country is even harder, because many paddy farmers never had property title in the first place. The land was left uncultivated for years due to the war, and now the government is trying to allocate land between the current occupants and the returnees. Several representatives of the United Nations thought that the government was distributing land based on favoritism and bribes, and that the land issue has stirred up ethnic division. Land title is also required for bank financing.
11.    (SBU) Although state and private sector banks have increased their branches in the East, local business leaders still cannot get loans. Members of the Batticaloa and Trincomalee Chambers of Commerce complained bitterly that they could not receive bank loans because there were too many paper requirements, and they lacked proper land title or other collateral, so they turned to the informal market where the interest rates were twice as high. A regional representative from Hatton National Bank reported that it was hard to find good projects for lending, and they only lend out 45% of the money taken in through deposits.
12.   (SBU) There are also several cases where water shortages restrict economic growth.  The East has ample rainfall three months for one paddy rice crop, but the second crop requires irrigation. Water shortages can create problems for industry. For example, a proposed pineapple processing plant never materialized because the GSL could not guarantee water supplies.
13.   (SBU) Eastern farmers and fisherman are also impacted by the lack of storage facilities and value added food processing. Since they cannot store their rice or fish catch, farmers and fishermen must sell immediately to Colombo middlemen to transport the goods, reputedly at very low prices.  The East also exports raw fish, with no processing, so there is less value added.   There is progress in the dairy sector, where, with USAID assistance, there are new milk storage facilities so cattle farmers receive higher returns.
14.   (SBU) The GSL Board of Investment (BOI) provides 15-20 year tax holidays for investments in the North and East, but locals have little enthusiasm for the BOI incentives. Although large Colombo companies are receiving BOI incentives, members of the Batticaloa Chamber of Commerce said that locals did not know how to write proposals, they did not have the proper collateral of capacity, so none of them have received BOI incentives.
15.   (SBU) The Tamil Diaspora could be an enormous resource for Eastern reconstruction, but the Diaspora has not invested yet. Our contacts gave several possible reasons, including that they were waiting for the political situation to stabilize, they were afraid that investment funds could be seized by the GSL, or they did not feel safe yet. Nevertheless, some Diaspora had visited the East, some were interested, and locals hoped that investments would come in the future.
Strong Ethnic Tension
16.   (SBU) Our contacts saw all local issues, from government allocation of land and contract awards, through an ethnic prism. Several contacts worried that Tamils and Muslims were being shoved aside in favor of Sinhalese from Colombo or the South.  The area still felt militarized, with frequent security checkpoints, although people were waved through.  Former military leaders hold key unelected positions and represent the federal government, such as Eastern Province Governor Rear Admiral Wijewickrema and the Trincomalee Government Agent Major General De Silva, (both appointed by the GSL). Several Tamil contacts also reported that they must register with the GSL when they travel to Colombo, which is not required of others.  In general, ethnic identity and resentment are just below the surface in the East.
17.   (SBU)  Comment. The GSL has successfully brought back paddy rice production and fishing, but the way forward is much harder.  The GSL can pursue some ethnically neutral development strategies such as road building, incentives for apparel factories, and improved storage facilities.  However, the region’s best immediate bet is tourism, and the local companies simply do not have the capacity to build international quality hotels. The GSL could set aside some plots for local investors, but it has not done so. The GSL policy to award land to Colombo developers, combined with issues of land allocation for returnees, has helped exacerbate a tense ethnic situation.  In short, the East has recovered its basic agricultural capacity, but improvements in the economy have not yet ameliorated ethnic tension.  End Comment.
BUTENIS
Back to Top