Sri Lanka's new government can take advantage of recent infrastructure projects

After the election of President Maithripala Sirisena in January 2015, the spending habits of former President Mahinda Rajapaksa’s government have come under increased scrutiny, with efforts to improve transparency being a critical priority for the new administration. President Sirisena ran on a platform of confronting corruption, which at the time took the form of official investigations into contracts for public works projects under the previous administration.

Investigations revolved around several large-scale development projects largely located near Medamulana, Rajapaksa’a home town, and the previous administration’s extensive involvement with Chinese lenders and contractors in delivery of new transport infrastructure, with Sri Lanka receiving an estimated $4.8bn in commercial loans from China between 2005 and 2012. China stood as the country’s leading foreign investor in 2013, with Nitin Gokhale, a national security analyst, telling the International Business Times in January 2015 that 98% of Chinese investments took the form of soft loans.

White Elephants

The new government is working to put an end to so-called white elephant projects, which have been exemplified by two recent developments: the Magampura Mahinda Rajapaksa Port (MMRP) in Hambantota and the nearby Mattala Rajapaksa International Airport (MRIA). The first phase of MMRP was completed in 2010 at a cost of $361m, jointly funded by the Export-Import Bank of China and the Sri Lanka Ports Authority (SLPA). The second phase remains ongoing, with China Merchants Holdings International forming a joint venture with China Harbour Engineering for the planned container terminal at an estimated cost of $800m. Bunkering facilities were set up at a cost of $76.5m and began operations in June 2014, according to the Board of Investment, while a tank farm has subsequently commenced commercial operations, and drove revenues of LKR5.39bn ($38.8m) in 2014, according to SLPA.

The MRIA, meanwhile, was planned to be a driver of development in the south, as well as a secondary entry point for tourists, attracting a multitude of international airlines. It received $209m in Chinese loans before opening in 2013, but since then has seen almost every airline halt services as a result of low demand, despite considerable potential for future expansion in the relatively rural, under-developed area. Authorities report the airport ran at a loss amounting to LKR2.75bn ($19.8m) in 2014, according to the International Business Times.

Salvage

The challenge has since become how to salvage and extract some value from the projects already completed, with private developers also playing a role. International hospitality chain Shangri-La’s Hambantota Resort & Spa is set to open in summer 2016, bringing with its international network and brand name. The property spans 18.2 ha and includes 300 beach-front rooms. The location of the resort, near Yala National Park and other wildlife viewing spots, should help draw more tourists to the region.

Meanwhile, prospects are improving for Hambantota’s Port. Sri Lankan company Laugfs Gas has planned a private investment of $80m into what will be one of the largest liquefied petroleum gas import-export terminals in South Asia in terms of storage capacity. In late 2015 it signed a deal with China Huanqiu Contracting and Construction Corporation for the turnkey contract. The terminal will initially have a capacity of 30,000 tonnes. “Although constructed at a huge and certainly uncalled for cost, the reality is that Hambantota exists in its current form and the large-scale infrastructure development presents a wonderful opportunity for a small country like Sri Lanka,” Romesh David, president of Sri Lankan John Keells Holdings’ Transport Group, told OBG. “The transport infrastructure via the port and airport, with railway and highway connectivity to follow, make it a perfect second transport node and hub offering.”