Large construction projects in Sri Lanka move forward despite rising input costs


Renewed growth in Sri Lanka’s construction industry is being supported by a combination of mega-projects with international partners, strong domestic demand and public investments in infrastructure. Following a slowdown in 2015, the sector is once again enjoying double-digit growth, possessing a strong order book with international investors increasingly present. Still, costs are high and rising, and there are risks to the outlook, while the pace of reform and government project roll out can be slow. However, new initiatives for public-private partnerships (PPPs) and the progress being made on key developments bode well for the future.

Strong Growth 

The construction industry has expanded strongly – if not unevenly – over the past seven years, with annual growth averaging 19.1% between 2011 and 2016, according to figures from the Central Bank of Sri Lanka (CBSL). Rates have slowed since the boom years earlier in the decade: in 2011 the sector grew by 34.3%, followed by a 37.5% increase in 2012. This moderated to 15.2% in 2013 and 13.7% in 2014, dropping to 1.8% in 2015. However, 2016 saw growth pick up again to 12.5%, taking the sector’s total contribution to GDP to LKR923bn ($6bn), while the first three quarters of 2017 brought in LKR773.5bn ($5.1bn), equal to 8% of year-to-date GDP.

Several factors can explain this fluctuation. In the early years of this decade, Sri Lanka was still experiencing a post-war boom, led by government and international construction efforts. However, the country experienced a financial sector correction in 2012, which may have had an impact on investor confidence. This was followed by a sharp slowdown in 2015 that can partially be attributed to political uncertainty during a double election year, which resulted in an unexpected victory for the opposition and an untested new coalition. The current administration has committed to addressing Sri Lanka’s precarious budgetary position through fiscal consolidation, and reappraising the previous administration’s ambitious infrastructure projects.

Momentum Resumed 

Once the newly elected government headed by President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe was in place, uncertainty faded. The administration garnered high regard from investors and international partners for its determination to strengthen Sri Lanka’s macroeconomic fundamentals by reining in debt and reducing the budget deficit, which topped 7% in 2015. Both factors had threatened to undermine economic stability and the country’s recent post-war success. The $1.5bn three-year deal signed with the IMF in April 2016 further bolstered confidence and reform efforts, and after analysing contract terms and economic rationale, the government decided to continue with a range of big-ticket projects, including Port City Colombo, Hambantota Port and various new motorways.

The construction sector grew by 12.8% in value-added terms during the first half of 2017, down slightly from 13.5% in the same period of 2016, according to an economic developments report published by the CBSL in November 2017. The strong growth in construction activity also helped drive expansion of 18.1% in mining and quarrying in the first half of 2017.

The CBSL stated in the same report that private construction of condominium and commercial real estate would continue to drive overall private investment growth in 2018. It forecasts that government investment will also forge ahead, with certain infrastructure projects prioritised to support economic growth.

Construction Costs

Construction costs have risen steadily over the past decade, as demand has grown and the price of labour and building materials have climbed. Sri Lanka imports the majority of construction materials used, and the weakening of the rupee since 2015 has driven up prices.

The CBSL’s cost index for all forms of construction, which uses 1990 as the base, rose from 370.2 in the first quarter of 2007 to 654.1 in the last quarter of 2016, representing a 77% increase over the period. The index rose 3.8% in 2016 alone, from 630.3 at the end of 2015. “Construction costs are driven by four major factors,” Suresh Rajendra, president of the property group at John Keells Holding, a major Sri Lankan conglomerate, told OBG. “First, almost all materials are imported, and taxes and import levies push up costs. Second, labour productivity is low and the net labour cost is very high, so thousands of workers are brought in from China, Bangladesh, India and Nepal. Third, the cost of energy is also high. Lastly, logistics tend to become expensive due to invariable delays in clearing materials from the ports.”

Rajendra notes that construction costs in Sri Lanka average $70 per sq foot, compared to $45-50 in Indonesia and Malaysia. For high-end properties, costs of $120 per sq foot compare to $100 in other south-east Asian countries. Rising costs have, in turn, had an impact on property prices and affordability for purchasers, while also eroding developers’ margins in the middle-income segment. High input prices have also led the authorities to look afresh at PPPs in order to share the cost of investment with the private sector.


Lending to the construction sector – including personal housing loans – has grown rapidly in recent years. In 2016 commercial banks’ loans and advances for construction activities totalled LKR811.25bn ($5.3bn), up 27% from LKR639.24bn ($4.2bn) in 2015. This lending category more than doubled in the four year to 2016, from LKR329.56bn ($2.2bn) in 2012. Of the 2016 total, LKR386.69bn ($2.5bn) – or nearly half – was in the form of personal housing loans, including for property purchases, construction and repairs. This was up from LKR304.23bn ($2bn) in 2015.

The CBSL has been cautious about the growth rate of credit to the private sector, implementing a series of interest rate hikes and an increase to the minimum reserve requirement in 2016-17. Aware of concentration risks, commercial banks have also looked to rebalance their portfolios and reduce overall exposure to the real estate and construction sectors. However, given the rate of total credit growth – expected to be 16-18% in 2018-20, according to Colombo-based investment bank First Capital – it will be possible for banks to reduce overall exposure while maintaining a steady flow of lending to these sectors, rather than drastically shrinking the amount of credit offered.


Sri Lanka scores relatively high in the region for its construction legislation. In the “Doing Business 2018” report published by the World Bank, Sri Lanka ranked 76th out of 190 economies for ease of dealing with construction permits – behind only the Maldives (54th) regionally, and well ahead of India (181st), Pakistan (141st) and Bangladesh (130th). However, other related areas are more problematic: the country ranked 157th for registering property – behind India (154th), but ahead of Bangladesh (185th), the Maldives (174th) and Pakistan (170th).

Bureaucracy and a lack of market data are regularly cited by investors as challenges in the sector, while corruption is also an issue in some areas. However, many of these concerns are common to other emerging economies as well and have not deterred a range of international companies from entering the market. Still, the government’s pro-business stance and encouragement from the private sector may help ease some constraints in the medium term. “Sri Lanka is not a difficult place to invest,” Rajendra told OBG. “The construction approval process is very clear, but there is a lack of transparency and the market is not yet mature. Land prices can be influenced by a single transaction; and transaction statistics should be available to the public in order to drive an orderly market.”

Property Market 

Colombo’s burgeoning property market has been one of the major drivers of construction growth over the past few years. Real estate has increasingly been favoured as an asset class, particularly by the affluent. Global property consultancy JLL forecasts that 3740 luxury units will come on-line in the capital through projects launched in 2017-19. This has led to concerns about oversupply and a possible correction in what has been a buoyant market, which would cause delays to planned projects. “Some measures suggest that the market is fine, while others show a concern,” Shiran Fernando, chief economist at the Ceylon Chamber of Commerce, told OBG. “Incomes are rising, equity is less favourable as an investment, and the success of the small and medium-sized enterprise segment may continue to feed into real estate. However, some projects could still be delayed if they have concerns about yield and slowdown in credit.”

Nonetheless, leading developers are confident that well planned and well executed developments, which bring distinct offerings to the market, will continue to generate demand. John Keells Holding, for instance, is pressing ahead with its Cinnamon Life complex near Beira Lake in central Colombo. The mixed-use development will consist of two residential towers, one with 245 units and the other with 195; an 800-room hotel; a 24-floor office tower with 10,000 sq feet per floor; and a shopping mall with 250,000 sq feet of gross leasable area. The residential and office components are due to be completed by the end of 2019, with the hotel set to be opened six to seven months later. “We believe there is a lot of potential for mixed-use developments going forward,” Rajendra told OBG.

Affordable Housing 

Outside the luxury market, demand is robust, particularly in the low- and middle-income segments. Rural-urban migration and rising wages are driving interest, and as in many emerging and developed markets, there is a shortage of affordable housing. More than 50% of Colombo’s population live in shanty towns, a pressing issue that the Urban Development Authority is trying to address. The authority is committed to clearing shanty towns and selling the land to private sector developers, reinvesting the money in social housing construction.

The 2017 budget proposed a home ownership programme for low- and middle-income families, with the private sector encouraged to construct 100,000 units at LKR5m ($32,600) per unit and a further 250,000 units at LKR1m ($6530) each over the 2017-19 period, with the government providing land and amenities free of charge to developers. Progress has been incremental, but with the top end of the market nearing saturation and demand strong, sector insiders are optimistic despite constraints. “The government is actively trying to involve the private sector, which has been slow to participate in affordable housing, as the margins have traditionally been tight,” Rajendra told OBG.

He adds that Sri Lanka could look to the example of Malaysia, where green and modern township developments around major cities have proved highly successful. However, there is some grassroots resistance to shifting citizens to modern affordable housing, as some residents do not want to move from central areas where they have established communities, even though the housing is of poor quality. Local politicians who rely on their votes are also sometimes opposed to redevelopment and relocation efforts.

Major Projects 

In addition to the high demand for affordable housing, several major projects will drive sector growth in the coming years. One of the biggest initiatives is Port City Colombo, a $1.4bn development in the centre of the capital on 269 ha of reclaimed land. The Chinese-backed project is aiming to attract $13bn in primary investment to the city as it takes shape, while creating a new financial and services capital serving South Asia and beyond. Developers are expected to begin building in 2018 as land reclamation continues. The city is envisioned to be a centrepiece of the broader Western Region Megapolis, a 15-year, $40bn development plan for the Greater Colombo area that aims to transform the capital and raise the western region’s GDP to $230bn by 2030. The Western Region Megapolis Master Plan forecasts 140 developments – most to be structured as PPPs – to reshape Colombo into a global city, with various satellites earmarked for industry, science and technology, and aerospace activities.

Further south, in December 2017 the government formally handed over the Hambantota Port – also called the Magampura Mahinda Rajapaksa Port – to Hambantota International Port Group and Hambantota International Port Services, joint ventures of the China Merchants Port Holdings Company (CMPH) and the Sri Lanka Ports Authority. The companies have a 99-year lease on the facility under a $1.12bn deal, with CMPH holding a 70% stake. The transaction should spark development of the port, which has stalled in recent years due to local protests regarding Chinese control and a reassessment of the deal, first signed in 2010. CMPH has agreed to invest $600m in outfitting and upgrading the port, which has been designed to become a major international logistics centre.


By 2019 the emerging trade centre at Hambantota should be connected to Colombo by the Southern Expressway, which already links the capital to the southern centre of Matara. One of the most high-profile projects of recent years, this exemplifies the benefits of infrastructure development: considerably reducing travel times in the south-west of the country and taking pressure off regional roads around the city. Travelling from Colombo to Matara now takes as little as an hour and a half, from four hours previously. The expressway has also helped boost tourism in the region by making day and weekend trips from Colombo more viable. While few dispute the 126-km road’s importance, its construction was somewhat controversial due to mounting costs, which more than doubled from an estimated $348.75m to $741.1m.

The first section of the road, stretching from the Colombo suburb of Kottawa to Galle, opened in November 2011, and was partially funded by the Asian Development Bank and the Japan Bank for International Cooperation. This was followed by the segment linking Galle to Matara in March 2014. The latter stage, with a project value of $165m, was delivered by Chinese contractors and funded by a loan from the Export-Import Bank of China (Exim Bank).

The LKR103.2bn ($673.8m) Southern Expressway extension from Matara to Hambantota is also being funded by Exim Bank, and was over 50% complete by early 2018. It is being delivered in four sections: Matara to Bellatta (30 km), Beliatta to Wetiya (26 km), Wetiya to Andarawewa (15 km) and Hambantota to Mattala via Andarawewa (25 km). The four-lane motorway is likely to be expanded to six lanes in the future.

Central Expressway 

As the Southern Expressway extension nears completion, work on the equally significant Central Expressway is pushing forward. The artery will link the Colombo suburb of Kadawatha to Dambulla in the centre of the country, with an off-shoot to Kandy, a popular tourist destination home to many tea plantations. The project is being executed in four phases, all in various stages of implementation.

The first, from Kadawatha to Meerigama, is being funded through a $1.1bn loan from Exim Bank. Construction proceeded in 2017 despite some delays to funding, and the segment is due to be complete by 2020. Construction on phase two, a 39.7-km stretch from Meerigama to Kurnegala, began in early 2017. It is expected to be finished in 2019. The civil works will cost LKR137bn ($894.5m) before taxes, with LKR2.2bn ($14.4m) and an additional $5.86bn for construction supervision, and LKR6.5bn ($42.4m) for land acquisition and resettlement. Also in 2017, the government pushed ahead with land acquisition in preparation for the construction of phase four of the Central Expressway, a 60.3-km link from Kadawatha to Dambulla.

In February 2018 Japan’s Taisei Corporation was awarded the contract to build the 32.5-km third phase of the project, funded by a $940.7m package from Tokyo Mitsubishi Bank. In the same month, Indian engineering firm RITES won a contract to provide consultancy services for improvements to roads that connect to the expressway. The motorway is likely to provide a boost to construction activity in the regions through which it passes – particularly Kandy.

Transit Undertakings 

In November 2017 the government signed a memorandum of understanding with South Korea’s Seoyoung Engineering for a LKR202m ($1.3m) feasibility study on the proposed $6bn Colombo light rapid transit system. The network has been keenly awaited by residents and developers alike, given its potential to ease traffic pressures and boost residential housing demand outside the centre of Colombo, including in the suburb of Malabe, which would be the terminus of one of the lines. The project proposes seven lines totalling 75 km. The government aims to begin construction in late 2018.

Authorities are also under pressure to overhaul the national railway network and state operator Sri Lanka Railways, which posted losses of LKR7.7bn ($50.3m) in 2015 and LKR6.8bn ($44.4m) 2016. Progress on long-awaited railway electrification has been slow, with the cost of electrifying a 64-km stretch of suburban railway around Colombo alone estimated at $300m. Other projects are moving forward, however, and in January 2018 contractors started laying track on the Matara-Kataragama railway extension project, which is funded by Exim Bank and being constructed by China National Machinery Import and Export Corporation.

In the first quarter of 2018 investors were awaiting the award of contracts for the second phase of Colombo’s Bandaranaike International Airport upgrade. The airport is currently running well above its capacity of 6m passengers per year, handling 9.5m in 2016. The $550m expansion project is being funded by the Japan International Cooperation Agency and will raise capacity to 15m passengers per year, potentially providing a significant boost to the tourism industry.

Energy & Utilities 

Foreign contractors are also finding opportunities in the energy and utilities sectors. Economic growth, urbanisation and the government’s goal of addressing citizens’ basic needs all make this type of infrastructure a priority. In December 2017 US-based Tetra Tech was awarded the $74m contract to construct a new integrated water supply project (IWSP) for the city of Badulla, one of a series of such projects around the country. A few months before, Belgian construction company BESIX completed its €24m Monaragala and Buttala IWSP, with 11 sites spread over 300 sq km supplying drinking water to approximately 80,000 people. “There are a lot of projects coming up in water treatment,” Paul Callebaut, resident manager of BESIX Sri Lanka, told OBG. “Sri Lanka needs to extend its water supply, as there are still areas where there is no nearby access to clean, publicly available safe drinking water. The country must also deal with wastewater, as currently only 5% is treated by plants.”

Furthermore, in February 2018 India’s Petronet and Japanese partners Mitsubishi and Sojitz announced a $300m investment in Sri Lanka’s first liquefied natural gas terminal near Colombo. The floating receiving facility will have capacity of 2.6m-2.7m tonnes per year – considerably larger than initially planned.


Although Sri Lanka has successfully undertaken some PPP projects, they have been under-utilised in the country overall. One reason is that a specific legal framework to support and regulate such partnerships has been lacking, so coalitions have largely been formed on an ad hoc basis. Another factor is political opposition to the model. “PPPs have been rare in Sri Lanka, as there is a misconception that they are more expensive than loans,” Callebaut told OBG. This is changing, however, with the establishment of the National Agency for Public-Private Partnerships (NAPPP) in 2017. The NAPPP is a central organisation with the legal, administrative and financial authority to manage the initial stages of PPPs. This includes identifying suitable projects, preparing guidelines for partnerships, inviting bids and selecting investors in cooperation with the relevant ministries. The agency had an initial budget of LKR75m ($490,000) and 17 employees, according to local press, but has the potential to scale up once it gains traction.


In November 2017 Thilan Wijesinghe, the head of the NAPPP and former Board of Investment chairman and Treasury official, said that the agency needed the government to issue new guidelines for it to operate effectively. The body currently functions under 2006 public procurement guidelines, as well as 1998 rules for infrastructure development through PPPs. Wijesinghe called for a new system to allow PPPs to be fast tracked, and pointed out that procurement and investment-driven PPPs are fundamentally different. He also advocated for the elimination of the 2006 regulations, which he believes have led to projects stalling, costing taxpayers considerable sums.

The government has many reasons for strengthening the environment for PPPs, which could help fulfil three of its major goals: reducing the budget deficit, encouraging private sector development and attracting additional foreign investment. Models such as build-operate-transfer ease much of the cost burden of infrastructure development for the government, while providing opportunities for private and foreign investors to participate in Sri Lanka’s growing economy.


The construction industry looks set to enjoy another strong year in 2018. The boom period may be in the past, but a more stable, robust industry with a more predictable outlook has emerged. The government’s decision to push ahead with big-ticket projects is having a positive effect on demand, although some promising plans – including the PPP agency and affordable housing schemes – still remain a work in progress. The maturing economic climate should also benefit the sector, maintaining demand for private property.


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The Report: Sri Lanka 2018

Construction & Real Estate chapter from The Report: Sri Lanka 2018

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