Sri Lanka's roads improve and the government secures funding for further upgrades

Rural connectivity is poised to improve significantly, with the government securing financing from the Asian Development Bank (ADB) to rehabilitate over 3400 km of rural roads. These road renovations form part of an expansive infrastructure agenda that will also see the construction of a host of rural expressways in the coming years. Although budgetary shortfalls could make it difficult for the government to allocate the necessary funding for all of the planned developments, the creation of the Special Infrastructure Company (SIFCO) in February 2017 – intended to focus almost exclusively on highways – should help the authorities meet their targets. Importantly, SIFCO is setting the foundations for future private sector participation in the sector, with public-private partnerships (PPPs) set to play an increasingly important role in development as a result.

Rural Roads 

According to figures from the ADB, roads account for 95% of inland passenger traffic and 98% of freight traffic, and the country has 16,000 km of provincial roads and 80,000 km of local roads. The condition of provincial and local roads is considerably poorer than national road averages, with higher travel costs and longer journey times. Despite strong improvements in addressing trunk road deficiencies over the previous decade, rural and provincial road upgrades have been slow to materialise, and most rural roads cannot provide all-weather access.

Government figures show that around 3000 km of national roads exceed traffic volumes of 10,000 vehicles per day, while economic growth has increased freight transport activities, which is contributing to accelerated road deterioration. This has led to the prioritisation of road upgrades. Indeed, the Rural Infrastructure Development Programme – a LKR13.3bn ($86.8m) state initiative to generate inclusive growth – had funded more than 20,400 rural access projects, worth a total of LKR10.2bn ($66.6m) as of March 2018.

Development Bank

In the past decade the ADB has provided considerable support to Sri Lanka. A $150m loan facility, approved in 2005, was used to upgrade some 270 km of national roads, with the government contributing $58m as part of a five-year investment plan. In 2010 the bank then approved a $150m emergency assistance loan for the urgent reconstruction of infrastructure as well as the deployment of essential services in war-affected regions.

Since the country’s civil conflict has ended, the ADB’s road transport assistance efforts have shifted back towards improving national connectivity. The bank’s 2012-16 partnership strategy with the country focused on upgrading the existing national road system, prioritising the construction of critical arterial roads to reduce traffic congestion. Importantly, the ADB has supported the government’s efforts to develop trunk roads by examining and assessing potential ways to increase private sector involvement.

Sustained improvement is being made, with the government reporting that as of the end of 2017 more than 4100 km of national roads, 4900 km of provincial roads and 39,000 km of rural roads have undergone complete rehabilitation. An additional 5000 km of national, trunk and rural roads are in the process of being upgraded.

Integrated Roads 

One of the largest rehabilitation projects currently under way is the ADB-backed Integrated Road Investment Programme (IRIP), launched in September 2014, which is aimed at both expanding rural connectivity, and stimulating economic growth through road construction and rehabilitation projects. As part of the second phase of the IRIP, the Cabinet approved plans in August 2017 to utilise ADB financing to rehabilitate 3400 km of rural access roads and 340 km of national roads in four provinces.

The first phase saw the ADB provide an $800m, multi-tranche facility to upgrade roads in six provinces. In September 2017 the ADB’s board of directors announced it had approved up to $900m of new financing for the second phase of the IRIP, which will cover three provinces and is expected to wrap up in 2027. As in the first phase, financing will be delivered in five tranches through to 2021, beginning with a $90m regular loan and $60m concessional loan. The state plans to cover $184.6m of the total cost of $1.1bn; however, accessing finance has proved challenging in the past and may dampen progress should it be an issue again.

Obstacles

Improving roads remains a priority for the government, as shown by the 2018 budget allocations of LKR4bn ($26.1m) for rural road improvements and a further LKR10bn ($65.3m) for the completion of the Central Expressway. However, the government is also working to raise levels of outside investment, particularly to meet longer-term financing goals. To this end, in January 2017 the state announced plans for a dedicated PPP division under the Treasury. This was followed by the February 2017 creation of SIFCO to finance new expressways, setting the stage for yet more private sector investment.

SIFCO 

Operating under the Road Development Authority (RDA), SIFCO is a public limited liability company incorporated under the Companies Act, with the RDA holding the majority of shares. In early 2017 Ravi Karunanayake, then-minister of finance, told local media SIFCO will own the Southern, Outer Circular and Colombo Katunayake expressways, giving it an asset base of LKR243bn ($1.6bn). SIFCO is set to undertake all future expressway developments, including those already under way. It has been estimated that these projects will require $4bn of investment through to 2021.

The Ministry of Finance has said that once SIFCO’s asset base is in place, the company will be able to both raise capital from private investors, and arrange financing for new projects using existing infrastructure and assets as collateral. This means that SIFCO projects will not fall under the public borrowing programme and that private investors have a new avenue to invest in infrastructure. The Treasury will arrange guarantees to lenders on an as-needed basis, while the revenues earned from expressways will be used to repay loans.

State Goals 

The government intends SIFCO to initially be used as a transitional vehicle that enables local capital market investors to provide financing for infrastructure projects. The end vision, however, is to open investment up to a wider variety of participants under a PPP framework, where private stakeholders also have the opportunity to manage operations.

To this end, in March 2017 the Cabinet approved a proposal to create negotiating and procurement committees to develop PPPs, beginning with highways. Build-operate-transfer models have been suggested as the best method to facilitate private financing for these infrastructure works. Prime Minister Ranil Wickremesinghe presented a paper to the Parliament that supported opening existing highway projects to private investors. He suggested placing them under SIFCO’s purview and then implementing PPP agreements. This would pave the way for new investment while also expediting delivery of major transport developments.