By: Staff Writer
July 07, Colombo (LNW): The Colombo Port City Economic Commission is proposing to use Sri Lanka’s largest Special Economic Zone as a testing ground for labour market reforms, arguing that outdated employment regulations not tax rates have become the country’s biggest obstacle to investment and entrepreneurship.
The proposal marks a significant shift in economic thinking after years of successive governments relying heavily on tax concessions to attract foreign direct investment.
Speaking at the CA Sri Lanka 5th Annual Economic and Tax Symposium, Director General Revan Wickramasuriya questioned whether generous tax holidays have delivered the intended results. He cited Port City’s own investment history as evidence that structural reforms carry greater weight than fiscal incentives.
Under an incentive package introduced in 2023, developers were offered tax holidays lasting up to 25 years. Despite the generous concessions, no major construction projects commenced before the scheme expired in August 2025.
Following revisions that reduced the maximum concession period to 15 years, construction activity accelerated. Developers are now moving ahead with projects under tax holidays of only 10 to 12 years, suggesting that certainty and policy stability may outweigh the size of tax incentives.
The Commission believes the next frontier is labour reform.
According to Wickramasuriya, Sri Lanka’s employment laws discourage business formation because entrepreneurs face considerable legal and financial barriers when attempting to restructure or close unsuccessful enterprises. This creates an environment where investors perceive higher commercial risks compared with competing regional economies.
Rather than immediately pursuing nationwide legislative reforms, the Commission is exploring whether Port City could function as a regulatory sandbox where more flexible employment regulations are piloted under controlled conditions.
Such a model would enable policymakers to assess whether greater labour flexibility leads to increased investment, faster business expansion and stronger job creation without immediately altering national labour legislation.
The argument also reflects wider concerns about Sri Lanka’s international competitiveness. Wickramasuriya observed that many Sri Lankan companies establish operations overseas despite paying taxes in those countries, while millions of Sri Lankans themselves work successfully under comparatively flexible labour regimes abroad. Worker remittances, projected to reach around US$9 billion this year, underscore the scale of that overseas workforce.
Recent investment figures suggest Port City is beginning to gain momentum. Since January 2025, four additional land parcels have been leased, taking the total to ten. Six projects valued at approximately US$500 million are currently under construction, while four more developments are expected to begin within the next six months. Around 185 licensed businesses now operate within the Port City framework, employing roughly 15,000 people.
Despite this progress, labour reform remains politically contentious. Trade unions and employee advocates have consistently argued that existing protections are essential to prevent unfair dismissals and safeguard workers’ rights. Business groups, meanwhile, contend that excessive rigidity reduces competitiveness and discourages both local entrepreneurs and foreign investors.
The Port City proposal therefore extends beyond a single economic zone. It could become the first practical test of whether labour market flexibility can deliver the investment, employment and economic growth that decades of tax incentives have struggled to achieve.