Sri Lanka supports increased investment through public-private partnerships

Rising public debt and spending rationalisation has brought public-private partnership (PPP) deployment to the forefront of economic and trade policy reforms, with the Vision 2025 development strategy emphasising increased utilisation and diversification of PPPs. Shared development frameworks are thus expected to expand beyond the mainstay power and transport sectors into education, health and tourism.

To support these goals the government launched a dedicated PPP Agency under the Ministry of Finance (MoF), which is expected to facilitate and accelerate PPP development, while benefitting from strong oversight to improve project selection and contract negotiation. The agency’s first task will be to establish a set of PPP guidelines, with both public and private stakeholders calling for improved transparency, open procurement processes and efficient project delivery, thus brightening the prospects for private sector-supported infrastructure development.

Debt Trap

In an August 2017 report titled “Sri Lanka PPP Diagnostic Note: accelerating infrastructure investment through PPPs”, the World Bank reported that Sri Lanka’s heavy reliance on international and bilateral financing for major infrastructure projects had become increasingly unsustainable.

Although multiple financial institutions – including the Asian Development Bank, the IMF and the Japan International Cooperation Agency – have funded infrastructure projects with debt financing, the World Bank reported that China is by far the largest foreign investor, accounting for nearly 70% of infrastructure projects receiving international funding. Sri Lanka has 16 Chinese-backed infrastructure projects under way, including the $1.4bn Port City Colombo project, which is the largest single foreign investment initiative in development.

High levels of public debt pose a serious near-term concern, as this model has become increasingly unsustainable. In September 2016 Forbes reported that Sri Lanka’s debt had risen to $64.9bn, of which $8bn is owed to China, with the debt-to-GDP ratio standing at 75%, and 95.4% of all government revenue channelled into debt repayment.

Furthermore, ratings agency Moody’s reported in December 2017 that persistent, large budget deficits and slower GDP growth had pushed Sri Lanka’s debt-to-GDP ratio to 79% at the end of 2016 – a 10% gain in four years – with interest payments accounting for 36% of government revenue in 2016. This means that Sri Lanka has one of the highest interest burdens of all sovereigns rated. Repayment obligations are set to hit a record high in 2018, significantly limiting the government’s ability to increase infrastructure investment and expenditure (see overview).

Infrastructure Requirements

This is problematic, given the government’s ambitious development plans – the Vision 2025 mid-term economic development strategy and associated Public Investment Programme (PIP) running from 2017 to 2020, call for billions of dollars of investment in transport, energy and social infrastructure. Investment requirements for transport projects alone are estimated at LKR1.33trn ($8.7bn) between 2017 and 2020, with LKR1.12trn ($7.3) for roads and highway projects, LKR32.5bn ($212.2m) for airports, LKR88.7bn ($579.2m) for ports and LKR84.3bn ($550.4m) for railways (see Transport & Logistics chapter).

This makes developing alternative sources of infrastructure delivery and financing a critical priority for the government, with PPPs offering the opportunity to leverage efficient service delivery under private firms and access new sources of capital, improve technological know-how and reduce risk. The World Bank notes, however, that not all public infrastructure projects will be suitable for procurement through a PPP, writing that “it is likely that a large portion of future investment into public infrastructure will still need to be publicly funded.”

The bank also warned that procuring public infrastructure projects through a PPP framework will not necessarily eliminate their fiscal impact, as the government might still be required to fund these projects, including through availability payments and minimum revenue guarantees. This has been the case for several recent high-profile transport projects in Hambantota (see Transport & Logistics chapter.) Sri Lanka has a strong track record of PPP development, with the World Bank’s PPP Knowledge Lab reporting that 79 PPP projects, collectively worth $2.75bn, have been completed since 1990, concentrated mostly in the utilities and transport sectors. However, PPP development has stalled somewhat, with the PPP Knowledge Lab noting that no domestic PPP project has reached financial close since 2012.

PPP Agency

In January 2017 the MoF announced plans to establish a separate division dedicated specifically to PPP development. Operating under the Treasury, the PPP Agency will receive LKR75m ($490,000) to launch operations. The World Bank will also provide funding in support of PPP development.

The Ceylon Chamber of Commerce (CCC) reported that the agency was first proposed in October 2016, when its National Agenda Committee on infrastructure met with the MoF to lobby for increased PPP deployment. The agency was launched officially at the CCC’s Investment Conclave hosted in Colombo in May 2017. At its inauguration the MoF announced that the agency will focus early efforts on project selection, implementation and transaction advisory services. According to Thilan Wijesinghe, chairperson and acting CEO of the agency, the MoF will seek to recruit personnel with experience in legal framework development, finance, investment and negotiation, with a particular emphasis on negotiation skills.

Agency Structure

Although the agency initially only offers guidelines and manuals as authorities develop the knowledge base to expand PPP deployment, from 2019 onward it plans to intensify its ongoing efforts to draft a robust legal framework for new PPPs. In 2018 it will prioritise developing guidelines for PPPs across 12 sectors.“The PPP agency will issue a set of guidelines to satisfy the market needs to have an official framework to follow,” Wijesinghe told OBG. “Through this, we can test the market and identify the bottlenecks and challenges faced by its stakeholders before publishing a proper legal framework.”

New departments are expected to be established across any relevant ministries to liaise with the agency. Over the longer term the PPP Agency is expected to serve as a single facilitation point for any potential investor in order to improve efficiency and expedite project development. “Having a single facilitation point is not only convenient for users that want to get assistance with their deals, but it also allows the PPP agency to learn from the market’s insights,” Wijesinghe told OBG.

The government has stressed that PPP development does not mean total privatisation of state-owned companies or assets; rather, it is seeking PPPs in which it has a long-term interest, and it is likely to opt for land and equity stakes for projects. The private sector has since called for several key considerations to be incorporated into future PPP policies, and the CCC announced in July 2017 that it had submitted a list of recommendations to the MoF to support fast-tracked PPPs, including project prioritisation, developing a fair, managed and transparent procurement process, and implementing an effective communication strategy regarding new projects.

Progress

PPP development has accelerated: in February 2017 the Road Development Authority announced plans to establish The Special Infrastructure Company, known as SIFCO, to assume ownership of its portfolio of runways, and to be responsible for developing all future expressway developments by raising capital from private investors, and negotiate new financing arrangements.

The 2018 budget, published in November 2017, stated the PPP Agency would issue guidelines by the end of April 2018, reporting that PPPs would be deployed for transport, power, water supply, health care, education, housing, agri-business, retail, mineral, real estate and tourism projects. Projects slated for PPP development in 2018 include an elevated highway from New Kelani Bridge to Athurugiriya, a marine drive extension to the Port City Colombo, other initiatives related to the development of Port City Colombo, a logistics park in Welisara and an inland water transport system. Meanwhile, divestitures for the year include Sri Lankan Airlines, the Hilton Colombo and the Grand Hyatt PPP diversification is also making progress: in January 2018 the government announced that the China Harbour Engineering Company would build a port tunnel linking the planned Port City Colombo to the Galle Face Green esplanade. The project is also slated to be developed under a PPP framework.