National strategies increase private investment in the Sri Lankan transport and logistics sector


Having a strategic location along one of the world’s busiest maritime trade routes, Sri Lanka is well positioned to capitalise on rising Indian Ocean trade volumes. Under the auspices of the economic development strategy Vision 2025, released in September 2017, authorities are moving to transform the country into a leading global trans-shipment and logistics hub.

Sri Lanka benefits from a deepwater coastline, giving it a competitive advantage over India. Cargo volumes at the country’s maritime hub, the Port of Colombo, have risen steadily in recent years, with the port recording double-digit growth in 2016. However, delays in building the East Container Terminal, the port’s next phase of expansion, weighed on operations in 2017. Increased capital investment in highway rehabilitation has improved road quality across the country, while rising passenger movements at Colombo’s Bandaranaike International Airport (BIA) have created new opportunities, with BIA’s passenger-handling capacity set to surge on completion of a planned new terminal.

However, inefficient state-owned enterprises (SOEs) and underperforming ports and airports in the town of Hambantota in the Southern Province have contributed to budget deficit pressures, in turn restricting the government’s capacity to finance new infrastructure, even as its Public Investment Programme (PIP) 2017-20 calls for billions of dollars of transport spending.


Vision 2025 emphasises public-private partnerships (PPPs) as an important financing mechanism, and policies aimed at supporting the deployment of PPPs have already allowed expressway construction to be fast-tracked in recent months. In 2018 the government is expected to intensify its efforts to attract new private sector investment across all segments of the transport sector, with the national rail network, a planned light rail system in Colombo, multiple expressways and select domestic airports offering high-potential investment opportunities. A recent deal to sell a majority stake in Hambantota’s Magampura Mahinda Rajapaksa Port (MMRP) should jump-start efforts to attract logistics investment in the region, and may breathe new life into the nearby Mattala Rajapaksa International Airport (MRIA) as well.


The Ministry of Transport and Civil Aviation (MTCA), the Ministry of Higher Education and Highways (MHEH) and the Ministry of Ports and Shipping act as the main regulators of the sector, but a host of other ministries, departments and SOEs oversee various segments. For example, the Road Development Authority operates under the MHEH and holds primary responsibility for the national highway network and class A and B roads, while provincial councils are in charge of class C and D roads, and local authorities manage rural and unclassified roads.

The Sri Lanka Ports Authority (SLPA) is another important SOE. The SLPA is responsible for operating the country’s six commercial ports, including the Port of Colombo, though private companies have also made forays into the Port of Colombo and MMRP in recent years, particularly as the SLPA’s mounting debts have limited its ability to finance new projects. Meanwhile, Sri Lanka Railways (SLR), which works under the MTCA, stands as the sole rail service provider, managing all operations across the 1562-km national rail network.


Aviation is regulated by the Civil Aviation Authority of Sri Lanka, which is charged with monitoring the segment’s environmental impact and plays a facilitating role, providing the necessary legal framework, instructions, guidance and enforcement with continuous surveillance in the planning and executing of new developments. The creation of the entity, established in 2002, sought to align Sri Lanka’s industry with the International Civil Aviation Organisation’s Standards and Recommended Practices.

The national carrier SriLankan Airlines was established in 1979. Its fleet of 27 aircraft – comprising 13 Airbus A330 long-haul jets and 14 Airbus A320/321 medium-haul aircraft – flies to 105 cities in 47 countries. It has direct flights from BIA to 36 destinations, with the remaining services provided under various codeshare agreements with carriers from Canada, the UAE, Finland, Japan, Malaysia, Myanmar, Oman, Australia and Qatar. In attempt to streamline operations, SriLankan Airlines absorbed its low-cost subsidiary Mihin Lanka in September 2016. Following the merger, SriLankan Airlines counted some 4.4m passengers in FY 2016/17, a record high. Despite this, the company continues to incur losses and has not made a profit since 2009. Plans to partially privatise the operator under a PPP have been under way since early 2015.

In niche services, meanwhile, growth has been forecast to pick up. “We expect to see increased Sri Lankan participation in the corporate and private jet market,” Johanne Jayaratne, executive director of Airport and Aviation Services, told OBG. “Asia has seen great expansions within this segment and Sri Lanka’s infrastructure and geographic location provide strong foundations for this type of commercial activity.”

Vision 2025 

Vision 2025 underlines transportation infrastructure as an important support mechanism for Sri Lanka’s evolution into a high-income country. The policy notes that the existing transport networks are inadequate and act as a notable drag on growth. Vision 2025 also points to poor project selection and insufficient financing mechanisms as reasons for the failures of recent large-scale developments.

Recognising the advantageous geographic position but limited domestic market, Vision 2025 seeks to transform the country into a leading transport and logistics hub. It aims to achieve this through four new economic corridors that run across the south-west, north-east, Kandy-Colombo and Colombo-Trincomalee. These pathways will be supported by accompanying highway and airport developments. As a whole, this endeavour should significantly improve regional and rural connectivity. PPPs have been highlighted as the most effective model for financing and executing projects within the plan. To this end, the PIP 2017-20 has identified more than 1000 ongoing and future undertakings that can be accessed by investors.

Megapolis Integration 

Vision 2025 dovetails with the Western Region Megapolis Master Plan, released in 2016, which envisions transforming the Western Province, including Colombo, into a modern global metropolis by 2030. The plan entails multiple transport upgrades, such as the establishment of a multi-modal transport hub, railway electrification, the construction of additional terminals at the Port of Colombo and the modernisation of BIA as part of the aero city in Katunayake, with business parks, transit hotels and conference facilities. This will require a substantial boost in investment, with the plan outlining LKR1.1trn ($7.2bn) for roads works; LKR88.7bn ($579.1m) for ports; LKR84.3bn ($550.4m) for railways; LKR32.5bn ($212.2m) for airports; and LKR5.3bn ($34.6m) for repairs to public buses. All told, LKR1.3trn ($8.5bn) is due to be spent between 2017 and 2021.


With the state’s transport budget for 2018 limited to the Central Expressway and rural roads, PPPs will be key in financing upcoming developments. In January 2017 the government announced it would set up a new PPP agency under the Ministry of Finance with a budget of LKR75m ($490,000). The unit will be responsible for identifying potential opportunities, determining what projects go ahead and providing transactional support. Additionally, the agency will liaise with relevant ministries to expedite PPPs. In the 2018 budget speech, the ministry also called for the domestic airports in Sigiriya, Batticaloa, China Bay and Koggala to be renovated and expanded under PPP frameworks, presenting new private sector investment opportunities in aviation.

Meanwhile, the ports segment, which already makes use of PPPs, will likely benefit from planned amendments to the Sri Lanka Ports Authority Act No. 51 of 1979 and the Merchants Shipping Act No. 52 of 1971. These potential changes aim to improve competition in the segment by creating an independent ports regulator and removing some restrictions on foreign ownership in shipping and freight-forwarding. These alterations should encourage more international logistics operators to use Sri Lanka as a regional base.

Port of Colombo 

The port network extends from the island’s southernmost tip to the very north of the country via six main facilities located in Colombo, Galle, Trincomalee, Hambantota, Oluvil and Kankesanthurai in Jaffna. Located on the banks of the Kelani River, the Port of Colombo handles the vast majority of maritime traffic. Following Sri Lanka’s independence in 1948, authorities began expanding the port, first with the construction of 16 new berths along the newly built Queen Elizabeth Quay. A modernisation programme launched in the 1980s brought cranes and gantries onside, and the access channel was deepened in the 1990s to its current draught of 16-20 metres.

Expansions in the following two decades brought the total number of container terminals in operation to four: Jaye Container Terminal (JCT), Unity Container Terminal (UCT), South Asia Gateway Terminal (SAGT) and most recently, the Colombo International Container Terminal (CICT) located in the South Harbour. The SLPA operates the JCT and UCT, while private consortia manage the latter two under PPPs. However, in March 2018 a deal was inked between all the operators to act as a single unit. This change is expected to improve productivity by shortening wait times, as ships will be able to use any available berthing facility. The agreement also builds on Sri Lanka’s reputation as a leading trans-shipment destinations in the region. Today, the Port of Colombo is one of the top-30 facilities globally in terms of cargo volumes, outpacing major international facilities. The port now has 14 container berths, deepwater access channels, a 4-km-long quay, 47 quayside gantry cranes, 138 rubber-tyred gantry cranes, four rail-mounted gantry cranes and 402 terminal tractors and trailers.

Cargo volumes have surged, especially after the CICT commenced operations in 2014. According to government data, total container volumes rose from 4.1m twenty-foot equivalent units (TEUs) in 2010 to hit 4.3m TEUs in 2013, 4.9m TEUs in 2014 and 5.2m TEUs in 2015, while the total cargo volume handled increased by 27% over 2010-15, from 61.2m tonnes to 77.6m tonnes. More recently, figures from Lloyd’s List, a global ranking of the top-100 container ports, show that container volumes rose by 10.6% in 2016 to reach 5.7m TEUs, pushing the port ahead of Bremen in Germany and Tanjung Priok in Indonesia, which stood at 5.53m TEUs and 5.52m TEUs, respectively. Over January-November 2017 the Port of Colombo had handled 6m TEUs of cargo, up 4.6% year-on-year (y-o-y).

The higher volumes of cargo have translated into higher revenues. According to the SLPA, income increased by 5% in 2016 to reach LKR44bn ($287.3m). The majority of ships called at the CICT, which saw trans-shipment volumes grow by more than 11.8% in 2016, with trans-shipments now accounting for approximately 70% of the CICT’s revenues. However, as cargo volumes rise, congestion is increasingly becoming an issue. Shipping and trade news site reported that wait times at the port rose by more than two hours y-o-y over the first six months of 2017, registering an average of around 5.8 hours when anchorage and steam-in times were taken into account. However, this may fall in 2018 following the recent agreement formed between terminal operators.

Private Participation 

The Port of Colombo has benefitted from consistent private sector participation over the years and it remains attractive to outside investors, as evidenced by the high level of interest shown for the planned East Container Terminal.

The first privately backed development at the port came in 1999, when a consortium of domestic and foreign firms signed a concession agreement with the government to take over operations at the Queen Elizabeth Quay. This concession for SAGT was signed as a 30-year build-operate-transfer (BOT) contract, representing one of the largest foreign investments in the country at the time. The construction phase of the SAGT contract was completed in 2003. A consortium that includes China Merchants Holdings International and Aitken Spence signed a 35-year BOT deal with the SLPA in 2011 for a new container terminal in the port’s South Harbour. The deal will see the construction of a 1200-metre container quay with an 18-metre draft channel. It will be able to handle vessels with a capacity of up to 18,000 TEUs, making it Colombo’s only deepwater port facility. It is being built on 58 ha of reclaimed land, giving it enough space for three or four berths. The harbour basin was dredged to deepen it to 18 metres at low water of ordinary spring tides, with US construction giant AECOM stating that dredging volumes had reached some 8m cu metres. Associated works included the construction of a container yard, the building of roads and the establishment of security and utility services. Works were completed in 2013 and added 2.4m TEUs of handling capacity.

State Profits 

Berth occupancy at the Port of Colombo is often high, which is partly due to delays in awarding a contract for the East Container Terminal, a facility that is expected to boost the port’s throughput to 10m TEUs by 2025. The PIP 2017-20 targets reaching 6.8m TEUs of container traffic by 2020, with 5.2m TEUs of this coming from trans-shipments. Total cargo volumes are forecast to hit 92.1m tonnes in 2018 and 103.4m tonnes in 2020. The tender process for the terminal was originally scheduled to be finalised in early 2017, after five international consortia and two individual bidders expressed interest. However, the project remains in limbo due to political pressure to keep the terminal state-owned and under the control of the SLPA. In November 2017 the government reported that the delays in awarding a contract for had cost the SLPA LKR3.5bn ($22.9m) in 2017.

Debts from MMRP in Hambantota have also weighed on the SLPA’s profitability, with Mahinda Samarasinghe, minister of ports and shipping, telling Parliament in November 2017 that LKR10bn ($65.3m) of the SLPA’s profits were channelled into servicing the debts from the port in 2016, reducing profits to less than LKR1bn ($6.5m). Furthermore, the costs of servicing these debts amounted to LKR12bn ($78.4m) 2017. These mounting expenses pushed the government to sell a majority stake in MMRP to a Chinese-led consortium in July 2017 (see analysis), resulting in the SLPA finishing the year with a profit of LKR12bn ($78.4m).

Taking Flight 

Other SOEs have suffered losses as well, including SriLankan Airlines. In FY 2016/17 its operational revenues rose to LKR136.7bn ($892.6m), a 5.6% increase over the LKR129.5bn ($845.6m) earned in FY 2015/16. Nevertheless, the company recorded a net group loss of LKR6.5bn ($42.4m) in FY 2016/17, more than double the LKR2.9bn ($18.9m) incurred the previous year. This was attributed to a 3% decrease in average fares in US dollar terms, with the depreciation of the Sri Lankan rupee against the dollar having a negative impact on the airline’s bottom line.

The repaving of BIA’s runways from January to April in 2017 also set the airline back, as it led to the cancellation of 600 flights. The lease cancellations for four new Airbus, including penalties and forfeited security payments, also added significant costs for the airline in FY 2016/17. Local media reported that the bank loan taken out to pay the penalty fee will cost the carrier approximately LKR1.5bn ($9.8m) annually for 12 years.

The government initiated efforts to bring on a private operator under a PPP in January 2015, though some stakeholders have asked whether Sri Lanka – which has a domestic population of 21.2m and relatively low levels of tourism – even needs its own national carrier. Although some investors, such as US equity firm TPG and Qatar Airways, have expressed interest in entering into a PPP with SriLankan Airlines, the company’s high debt loads and bloated workforce remain unattractive. Some have suggested the government wipe out the carrier’s debt and divest a controlling stake to any potential partner. As of yet, a clear decision has not been made.

Despite the challenging outlook for the national carrier, aviation prospects in the private sphere remain bright. BIA is still Sri Lanka’s the largest and most important international airport, with some 34 foreign and domestic airlines offering services from the airport. Among these are SriLankan Airlines and the private domestic carrier Cinnamon Air, as well as international carriers Emirates, Etihad Airways, Singapore Airlines, KLM Royal Dutch Airlines, Turkish Airlines, Thai Airways, Malaysia Airlines, Air India and Air China.

According to figures released from the Sri Lanka Tourism Development Authority in January 2018, the number of tourist arrivals reached an all-time high of 2.12m in 2017, up 3.2% over 2016, despite multiple setbacks that year (see Tourism chapter). The number of passenger arrivals across all airports increased from 2.1m in 2009 to 4.6m in 2016. Total passenger movements – which measures arrivals and departures – more than doubled in that period, from 4.2m to 9.5m.

According to government estimates, BIA, which welcomed the vast majority of arrivals at 2.09m, is facing pressing capacity and connectivity constraints. The airport is currently exceeding its designed capacity of 7.5m annual passenger movements. In addition, aircraft movements were expected to reach 75,000 in 2017, surpassing the threshold capacity of BIA’s existing runway. The figure is forecast to hit 100,000 in 2022, at which time BIA would require a second runway, while total annual passenger movements are projected to rise to 10m in 2018 and 11.1m in 2019.

Bia Expansion 

As a response to this capacity constraint, in February 2016 the MTCA announced plans to build a second terminal at BIA as part of the second stage of a $550m two-phase expansion that aims to boost the airport’s capacity to 15m passenger movements annually. The first phase, which will add an apron and taxiway, commenced construction in April 2017 and is scheduled for completion by October 2019.

The second phase is still under evaluation, but it is expected to be developed under a PPP. In March 2017 the Japan International Cooperation Agency announced it would provide JPY45.4bn ($407.7m) of financing for the second phase, which will go towards a multi-level terminal building, elevated roadway, new parking apron with 23 stands, taxiways, a multi-storey carpark, new sewage and water treatment plants, and a solid waste disposal incinerator. The new terminal is planned to have the capacity for wide-body aircraft, making BIA a competitive transit destination for long-haul flights. Transit passengers already accounted for a third of total passenger movements in 2014.

Work on the second phase was initially expected to start in November 2017 and be finished by end-2020, but as a winning bidder has not yet been announced, the completion date has been pushed back to 2022. To cope with the rising passenger traffic in the meantime, the MTCA opened a tender bid in February 2018 for the construction of an interim passenger terminal at BIA.


Sri Lanka has one of the most dense road networks in South Asia, with almost 2 km of roads per sq km. Even though a decade of capital investment into road rehabilitation has considerably improved the conditions of many roads, around half of the network is still made of unpaved gravel, and poor-quality rural roads and rising congestion continue to weigh on growth.

Large-scale roadworks to be developed under the PIP 2017-20 include the completion of the 118-km Central Expressway linking Kadawatha to Kurunegala, Pothuhera, Kandy and Ambepussa; the 73-km Ruwanpura Expressway; construction of 12.7 km of elevated road in Colombo; rehabilitation of 2400 km of national highways; gridlock reduction via 300 new bridges on national and provincial roads; renovation and reconstruction of 1000 rural bridges; and improved connectivity between 2500 villages through the rehabilitation of rural, provincial and national roads.

Some 5000 km of roads across all three levels of administration are in the process of being rehabilitated, with the Asian Development Bank financing a significant portion of the work. The country’s network of operational expressways stands at 171 km, with this set to expand following the completion of the coming expressway network. As outlined in the PIP 2017-20, the network will comprise the Southern Expressway, with an extension to Hambantota; the Outer Circular Expressway; the Colombo-Katunayaka Expressway; the Central Expressway; and the Ruwanpura Expressway. Of all of these planned developments, however, only the Central Expressway was mentioned in the 2018 budget speech. The state will spend LKR10bn ($65.3m) on this expressway, with private sector participation to cover the rest of its financing needs. In an effort to encourage more private investment, the Road Development Authority announced in February 2017 that it would establish the Special Infrastructure Company, which will develop new expressways in partnership with private investors, with the long-term goal of setting up PPP frameworks for future use (see analysis).


While rail has a smaller role in Sri Lanka’s transport sector, it could soon experience a renaissance. The PIP 2017-20 targets raising rail travel from 5% of total passenger transport in 2015 to 10% by 2020. SLR operates 411 train trips daily, of which 386 are passenger services. The 1560-km national rail network extends to every major city, and travel times by rail are usually faster than by road. For instance, a train ride from Mount Lavinia to Colombo Fort takes an average of 30 minutes, compared to 50 minutes by road.

SLR also benefits from extensive real estate ownership. According to a speech by Gayani de Alwis, vice-president of the Chartered Institute of Logistics and Transport, SLR owns 13,000 acres of land, as well as 160 main stations, and 1000 wagons and carriages with unused advertising space. These assets could provide the financing SLR needs to meet its medium-term targets. The national rail operator is facing several notable challenges, such as limited coverage and capacity, low average speeds, frequent delays, inadequate services during peak hours, a lack of innovation and modern technology, and a weak financial position that makes investing in these areas difficult. Indeed, De Alwis said in his speech that SLR’s annual deficit averaged LKR5.5bn ($35.9m) between 2007 and 2016. However, in May 2017 authorities announced that SLR’s losses fell from their peak of LKR7.7bn ($50.3m) in 2015 to LKR6.8bn ($44.4m) in 2016, due to lower fuel prices and higher revenues.

The completion of large-scale service expansions in the Northern Province in 2015 saw capital spending for the following year fall by 48.4% to LKR15.7bn ($102.5m) in 2016. Total rail passenger kilometres rose by a marginal 0.1% to hit 7413 km in 2016, supported by flat tariffs, increased road traffic and the northern network expansion. Promisingly for SLR, freight transportation was also up in 2016, with total goods kilometres rising by 7.6% from 130m tonnes in 2015 to 140m tonnes in 2016, resulting from higher volumes of coal, oil and cement moved by rail. The PIP 2017-20 outlines a bold target of increasing rail’s share of total freight traffic from 1% in 2015 to 5% in 2020, which would serve as a valuable source of income for SLR.

Improving land and asset utilisation would also help SLR reduce its losses. In December 2017 only 15% of SLR’s land assets were leased out for commercial purposes. Furthermore, just 28% of the companies that had leases paid their rent on time. Were this not the case, according to De Alwis, LKR1.5bn ($9.8m) of additional revenues would have been generated in 2016, which could have been used to reduce SLR’s deficit by more than 20%. There are opportunities to upgrade the operator’s existing technologies to improve ticketing, inventory control, real estate management, auditing and accounting. Such efficiency gains would substantially reduce SLR’s losses. Of all the transport segments outlined under the PIP 2017-20, the rail segment requires the third-highest amount of spending. It is estimated that repairs and rolling stock upgrades will amount to LKR84.3bn ($550.4m). In addition, the line linking Kurunegala to Habarana via Dambulla is budgeted to cost more than LKR14bn ($91.4m).

Colombo Light Rail 

Authorities are pressing ahead with a planned light rail project in Colombo, a key component of the Western Region Megapolis Master Plan. The system will connect developments around the 269-ha Port City Colombo, a new financial district and business hub that recommenced construction in 2016, with internal infrastructure scheduled to be completed by 2020. In November 2017 the Ministry of Megapolis and Western Development commissioned feasibility studies for the light rail system connecting Colombo’s suburbs to the new central business district.

At a press conference for the agreement, Patali Champika Ranawaka, minister of megapolis and western development, announced that works on the light rail were scheduled to begin before the end of 2018. The first phase will involve a 15.3-km line with 16 stops, connecting Fort Station with Malabe via St Joseph’s College, National Hospital, Cotta Road and Lumbini Temple. The total journey time is expected to be 27 minutes, considerably faster than the current two hours by bus. Eventually, authorities hope to expand the Colombo light rail through six subsequent phases. Once the network is complete, ridership is expected to be around 30,000 people per hour. The $6bn light rail will be developed as a PPP, with some financial support coming from the government of Japan under a soft loan. The MTCA plans to issue tenders to foreign investors for construction as well as maintenance and operations, with the deadline set for 2023.


While the government’s limited capacity to invest in new infrastructure has dampened the sector’s outlook, increasing levels of private investment should support upgrades. Recent years have seen authorities create a more supportive environment for private and foreign players, showing that the sector is open for investment. Vision 2025 has underscored the importance of private participation, with the new PPP unit set to have a major role in achieving this objective. This should bolster macroeconomic expansion, positioning Sri Lanka as a competitive regional and global transportation hub, and paving the way for more robust growth. On the public side, authorities remain focused on addressing the challenges of mismanaged SOEs as well as kick-starting stalled transport developments.


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The Report: Sri Lanka 2018

Transport & Logistics chapter from The Report: Sri Lanka 2018

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