During the war infrastructure was also a casualty. The World Economic Forum ranks Sri Lanka at a middle of the road 73rd out of 148 countries for its infrastructure. Countries Sri Lanka now competes for investment against are higher ranked and poor African ones are lower ranked than Sri Lanka on the infrastructure league tables. This is not a surprising outcome for a country that’s just finished a long-drawn conflict that diverted resources from development and decimated existing roads, rail and other useful structures.
After a spate of road, rail and port building by British occupiers at the turn of the 20th century to efficiently plunder the country’s resources and move troops quickly to quell any unrest, little was added to the stock. Infrastructure was a casualty of slow growth and outright incompetent economic priority setting of successive governments following independence. Unable to find jobs, educated and enterprising Sri Lankans left the country and then the country fell in to an abysmal conflict.
Governments stopped planning long-term infrastructure and only a fraction of money budgeted for things like road repairs and village culvert maintenance was actually spent.
The dark ages of infrastructure investment are probably now behind Sri Lanka.
Before it can aspire to rise higher in the middle-income league tables, its infrastructure deficit will have to be urgently addressed to attract investment. The plans are certainly impressive, but require careful implementation so that their contribution to economic growth and human development can be maximized.
Firstly, to build better infrastructure, Sri Lanka should tap its traditional bilateral and multilateral lending partners more. Since the island has graduated to middle-income status the types of projects the island’s traditional donors, like the World Bank, ADB and Japan, will support are evolving but their loans still attract low interest rates.
Better still construction contracts for the infrastructure they fund are awarded on competitive bids to local firms, and raw material procured locally. Both contribute to economic expansion during construction.
Contracts for Chinese-funded projects, on the other hand, are awarded to firms nominated from that country. Since almost all raw material and most workers also come from overseas there is little or no contribution to Sri Lanka’s GDP during construction. However, Sri Lanka will have to improve governance and have greater transparency to convince traditional donors to engage the country more than they are now doing.
Chinese contract prices for projects they fund also aren’t competitive. The new airport highway funded by the Chinese cost $11.3 million a kilometer compared to $7.2 million a kilometer cost for the Southern highway financed by the Japanese government and the ADB, where many Sri Lankan sub contractors did engineering and construction work. The costs of the two roads are not entirely comparable. The airport highway is wider and has a trace over marshy land, so would cost more.
However Chinese funded roads are famously expensive. Some ‘A’ class two-lane roads funded by their government and built by Chinese contractors in the North of Sri Lanka cost Rs160 million a kilometer compared to similar roads funded by the ADB and World Bank and built by Sri Lankan contractors that only cost Rs80 million a kilometer, Echelon learns from a Road Development Authority source. Surely the Chinese government will be happy to fund such infrastructure here because Chinese state institutions that carry out the engineering and construction make more than a fair share of profit.
The Chinese also finish projects faster because there are no complex pre qualifications of tenders. They also don’t care for the niceties that the ADB would.
The only reason why the stretch of the Southern Highway connecting the city of Galle to Matara is years behind schedule is the objection by one affected resident, whose case took two years in a court in Sri Lanka and then a further two years at an ADB tribunal. As a result, contracts for that section of the road couldn’t be awarded, delaying the project. Chinese loans don’t make allowances for hearing the pleas of the aggrieved. The Chinese also charge market interest rates on lending.
Before the hollering starts about the Chinese intentions here it’s worth recalling that construction contracts for the accelerated Mahaweli Scheme, funded by bilateral loans from European nations in the nineteen eighties, were also awarded on a similar non-competitive basis. Counties that were financing each reservoir, dam and electricity plant nominated firms to which the contracts were awarded. However, unlike Chinese loans European credit attracted low interest rates and had long repayment periods.
Chinese or Indian bilateral loans are never as competitive as ones from the World Bank and ADB and this is why the government should negotiate harder for better terms with the Chinese and Indians and also demand that more sub-contracts be awarded to local firms. This is the second point.
Thirdly, government should attempt to get its fiscal priorities in order. A budget deficit of 5.8% of GDP planned for 2013 has now been revised upwards to 6.5%. It will probably overshoot the revised figure when the year is done. As a low-income country Sri Lanka relied on low interest loans to plug the deficit with few complications. However, using commercial loans to pay the running costs of government generates poor value to the economy and is unwise.
There is no easy way around this infrastructure conundrum. There is a contribution the Chinese and Indians can make to build infrastructure that would otherwise not get done for years. However, it’s the government’s role to ensure it generates better value for the country on these investments in the short term.