Often referred to as the pearl of South Asia, Sri Lanka’s strategic position at the southernmost point between Africa, the Middle East and East Asia has supported its transformation into a leading global shipping hub. The Port of Colombo now stands as the largest and busiest in the region, benefitting from years of investment that have significantly increased handling capacity and cargo volumes. With a host of ambitious upgrades to the country’s ports now completed, the administration of newly elected President Maithripala Sirisena is renewing its focus on the island’s interior, where poor transport infrastructure has constrained access to basic services and overall economic growth, while stifling tourism potential.
With a number of Chinese-led transport projects delayed in 2015 in a bid to improve transparency and reduce costs, the government is increasingly targeting public-private partnerships (PPPs) and a broad array of international financing to carry out major planned infrastructure projects, which include upgrading thousands of kilometres of highways, expanding capacity at Colombo’s Bandaranaike International Airport (BIA), establishing mass rapid transit systems in its capital city and enhancing north-south transport links, which fell into disrepair during the country’s 25-year civil conflict. With investment in the sector rising and reforms ongoing, the transport sector is slated to expand significantly in the coming years, extending knock-on economic benefits.
Sector Overview
Transport development in Sri Lanka is overseen by a variety of overlapping government agencies, including the Ministry of Aviation; the Ministry of Transport (MoT), which is responsible for urban roads and railways; the Ministry of University Education and Highways, which develops policy for highways and expressways; and the Ministry of Ports and Shipping. Work is carried out by respective government authorities, including the Roads Development Authority, which is responsible for maintenance and development of the country’s national highway network; the Sri Lanka Transport Board, overseeing the country’s public bus systems; Sri Lanka Railways (SLR); and the Sri Lanka Ports Authority (SLPA.) In aviation, the Civil Aviation Authority regulates the sector while the government-owned Airport and Aviation Services (AAS) is charged with overseeing Sri Lanka’s commercial airports, including BIA.
Government Policy
Transparent, efficient development of domestic and international transport networks is a critical priority for the administration of President Sirisena. As a result, in July 2015 the United National Party, leader of the ruling United National Front coalition, announced it plans to re-evaluate“white elephants”, a reference to transport projects such as the Mattala Rajapaksa International Airport (MRIA), which was completed in 2013 but has since seen almost all air traffic, including services from national carrier SriLankan Airlines (SLA), halted. Similarly, the Magampura Mahinda Rajapaksa Port (MMRP), located near MRIA in Hambantota, was completed in 2010 but saw only around 24 ships make port calls in 2011 and 2012, according to figures from the Committee on Public Enterprise. While many of the temporarily halted Chinese led infrastructure projects have restarted as of early 2016 (see analysis), the government has increasingly focused its attention on international financiers and private investors, as well as upgrades to congested and dilapidated highway and railway networks.
Master Plans
In November 2014 the Official Government News Portal of Sri Lanka announced the MoT had formulated a Transport Master Plan (TMP) for the Colombo Metropolitan Region (CMR) and its suburbs in a bid to significantly reduce congestion by 2035. With the MoT reporting an estimated 300,000 vehicles entering the city daily and just 52% of the population using public transport, a number of key roads and public transport initiatives have been highlighted by the TMP. Under the plan, seven transport corridors, including the Galle, Horana, High Level, Malabe, Low Level, Kandy and Negombo roads would be upgraded and improved, while the MoT also hoped to launch bus rapid transit (BRT) and rail systems, including a monorail, to further reduce congestion.
The plan requires significant investment, however, with an expected cost of LKR1.72trn ($12.4bn), of which 12% would be allocated to the BRT system, 23% to roads development and 33% to build a new rail line between Panadura and Veyangoda. The MoT’s planned monorail system would run through the congested Malabe corridor and was allocated LKR292.4bn ($2.1bn), or 17% of the TMP’s total budget. As of the first half of 2016, talks about a monorail were developing along with suggestions for a more cost-efficient light rail system. While no project has been finalised and cost remains a concern, most stakeholders agree that some development, whether mass rapid transit or monorail, will play a necessary role in any overall strategy. With the changes in government in 2015, the implementation of many plans within the strategy has seen some delay.
The establishment of Sri Lanka’s new Ministry of Megapolis and Western Region Development following parliamentary elections in late 2015 is expected to have sizeable implications for Sri Lanka’s move towards mass transit, as well as its bid to decongest the province. In 2016 the Megapolis Master Plan was unveiled and included the incorporation of a new Megapolis Authority to help implement projects that fall under the project’s $40bn purview. However, significant obstacles remain in achieving this 15-year Megapolis vision, which include overlapping jurisdictions and syncing the Megapolis concept with various other development blueprints.
PPPs
PPPs have been rolled out on a number of occasions, particularly in port developments, with the World Bank highlighting the Queen Elizabeth Quay at the Port of Colombo as a prime example of a successful Sri Lankan PPP. Transferred to the private sector under a build-own-operate-transfer concession in 1999, the $240m investment was partially financed by the Asian Development Bank (ADB) and the International Finance Corporation. Today, the quay is overseen by a consortium of international shippers and is known as the South Asian Gateway Terminal (SAGT).
PPPs are fast becoming the government’s model of choice for new transport developments, both within the port segment and elsewhere in the sector. In 2011, for example, a 35-year build-operate-transfer concession was awarded to Colombo International Container Terminals (CICT), a joint venture between China Merchants Holdings International (CMHI), which holds an 85% stake, and the SLPA, to develop the 2.4m-twenty-foot equivalent unit (TEU) South Container Terminal at the Port of Colombo, with work commencing in December 2011. CMHI’s $500m investment was the single-largest foreign direct investment in the country at the time. The new South Container Terminal was officially inaugurated in August 2013, with work on the East Container Terminal, the second deepwater draft terminal at the Port of Colombo, beginning in May 2013.
The World Bank reports that the government has also earmarked several highways to be financed and operated by the private sector and is in the process of making the appropriate legal amendments to establish a system for collecting tolls, in partnership with the ADB, noting that the government is keen to pursue performance-based maintenance contracts for national road networks. The TMP, which requires at least LKR744bn ($5.4bn) in private investment, also included provisions for PPP models in financing the new transport developments it envisions.
Ports
Sri Lanka’s strategic location near the main sea trade routes of Europe and Asia has supported the country’s transformation into a leading sea shipping hub and trans-shipment point for cargo originating in, or en route to, the Indian subcontinent. The country’s main port facilities are located in Colombo, Galle, Trincomalee and Kankesanthurai, in addition to the new MMPR in Hambantota. The largest and most important of these is the Port of Colombo, the country’s premier commercial port, which handles both conventional cargo and containers, and is in the midst of an ongoing expansion that has already seen significant upgrades to handling capacity and the introduction of deepwater terminals (see analysis).
Outside of Colombo, expansions are also ongoing. The government’s port expansion strategy includes developing the island’s east coast for commercial fisheries at Oluvil Port, which opened in September 2013. Trincomalee Port has also been identified as a major shipping and export hub for the north-east region of the country. Galle Port is expected to be developed as a leisure facility in line with the government’s tourism development strategy.
Port Of Colombo
Located on the south-western shores of the Kelani River, the Port of Colombo has long served as an important Asian terminal, with documented shipping activities dating back to the early 14th century, when it was known as the Port of Kolomtota. Modernisation efforts during the 1980s saw the port equipped with new cranes, gantries and updated terminal requirements, and today the port holds four container terminals – SAGT, the SLPA-owned Jaya and Unity container terminals, the South Container Terminal operated by CICT and the newly opened, though underutilised, East Container Terminal. The Port of Colombo offers 14 container berths, a 20-metre access channel, over 4 km of quay, 47 quayside gantry cranes, 138 rubber-tyred gantry cranes, four rail-mounted gantry cranes, and 402 terminal tractors and trailers, while the South Harbour project added 12 quay cranes to its terminal.
Overcapacity
Despite a challenging global environment for the shipping industry in recent years, the Port of Colombo has seen volumes and capacity rise. Total container handling at the port increased to 4.9m TEUs in 2014, up from 4.3m TEUs in 2013 and 4.2m TEUs in 2012, according to the Sri Lanka Logistics and Freight Forwarders’ Association. In 2015 the port reached a new record for volume, handling over 5m TEUs, mostly trans-shipment, though also with steady growth in the domestic market.
“The containerised domestic market showed a growth of 8% year-on-year in 2015,” Erwin Haaze, CEO of SAGT, told OBG. “As a terminal operator one would like to see an increase in domestic cargo since that would result in a bigger captive market and attract more shipping lines and services.”
The Port of Colombo now ranks as the 29th-largest container port globally. Its combined container handling capacity stands at 7.65m TEUs, more than 150% of total throughput in 2015, positioning Sri Lanka to ride growth in trans-shipment volumes in the years to come. The port’s capacity is expected to rise further to approximately 10m TEUs once the East Container Terminal is fully operational.
Shipping
Sri Lanka has made clear its intention to operate as a regional shipping hub, competing with the likes of Dubai to the west and Singapore to the east. Its geographical position and its advanced deep-water container terminal facilities have enabled the country to capitalise on opportunities in trans-shipments, which is the core business for all terminals in the Port of Colombo. According to Tissa Wickramasinghe, general manager of commercial and marketing at CICT, only one-fifth of annual traffic is domestic cargo, with three-quarters of all trans-shipments coming from India. Wickramasinghe told OBG, “This 75% represents 12% of India’s total cargo, so that tells you where the demand comes from.”
Romesh David, president of the Transport Group at John Keells Holdings, which is part of the SAGT consortium, explained the push for more regional headquarters in Colombo, and said shipping lines want to be close to the source of business and combine regional and country offices, thus Mumbai being a popular hub for India. David added, “However, given its existing status as the pre-eminent trans-shipment hub for container traffic in the region, Sri Lanka has a multitude of advantages, both commercial and qualitative, to claim this space for the South Asian region, and global shipping lines should be encouraged to set up regional head offices here through proactive and practical legislation and incentives.”
Challenges remain in this regard. Some industry figures have called for reforms, citing issues such as government intervention in fixing charges, the implementation of market caps, laws requiring a minimum of 60% local ownership and the minimum exchange control tariff, which requires companies to pay a levy ratified by the central bank to local agencies, thereby increasing costs in comparison to regional ports. “The biggest constraints are the complex Custom laws, red tape and tax structure,” Samath Gammampila, Sri Lanka country manager for logistics firm Aramex, told OBG. “Dubai has three set duty structures, which has very much made it a trans-shipment hub, but in Sri Lanka every product has its own variations despite just 250 Harmonised System codes bringing in over 90% of import revenues. The system is old fashioned, and can vary on the day.”
Roads
Outside of the CMR, upgrades to the country’s national highway network, upon which more than 70% of traffic in the country travels, are another major priority. The World Bank reports that although Sri Lanka enjoys a higher road density than that in many developing countries, uncontrolled roadside development and years of poor maintenance have resulted in low travel speeds and poor service, discouraging long-distance traffic and constraining economic development outside of the CMR.
The ADB reports that Sri Lanka’s poor transport infrastructure, particularly its provincial and local authority roads, has hindered economic expansion and access to basic social resources. The World Bank also cites transport bottlenecks as a result of low highway capacity, lack of expressways connecting major growth sectors, and a lack of side lanes and paved shoulders, in addition to severe deterioration of provincial and local roads. With 65% of the population living in rural villages, road upgrades have been identified as a critical facilitator for economic growth, as well as a burgeoning tourism industry.
As the government increasingly moves to decrease its dependence on soft loans, most of which were sourced from Chinese lenders, the ADB has become an increasingly important partner in development of new transport projects, particularly roads projects. The bank already financed construction and upgrades for 634 km of expressways and national highways between 2010 and 2013 under new programmes, including the National Highways Sector and Eastern and North Central roads projects, completing the 30-km Galle-Colombo Expressway in 2013 and moving forward on a host of new projects aimed at improving north-south networks in recent years.
Major Upgrades
A few strategic expressway projects have reached completion in recent years, a majority of which found funding from the Export-Import Bank of China. The first and longest, the Southern Expressway, at 126 km, has greatly reduced travel times and improved development prospects in the southern portion of the island. Phase one from Colombo to Galle was finished in 2011, with an expansion to Matara finalised in 2014. Construction on the Matara to Hambantota component started in 2015, after some delay, and will improve connectivity to airport and port operations already completed in the city. The 25-km Colombo-Katunayake Expressway, connecting Colombo to BIA, was completed in 2013. Despite investigations into pricing, the project has paid huge dividends for travel in Sri Lanka. Previous trips to and from the airport required upwards of one-and-a-half hours. The new expressway has brought travel times down to under 30 minutes.
Key Expansions
A key development going forward will be the completion of the 99-km Colombo-Kandy Highway, carried out in three phases with later expansions to Jaffna and Trincomalee. The road to Kandy, one of Sri Lanka’s main urban centres, from Colombo is notoriously dilapidated, and upon completion the expressway is expected to bring notable benefits to Sri Lanka’s central region. Construction on the first phase commenced in August 2015.
The $800m, ADB-funded Sri Lanka Integrated Road Investment Programme, launched in September 2014, involves upgrades and maintenance across 2200 km of rural access roads to bring them to all-weather standards, as well as rehabilitation and maintenance of 400 km of national roads. The programme’s first tranche, disbursed in 2014, involved a $100m loan for improvement and maintenance of 560 km of rural access roads and 130 km of national roads.
The $100m Tranche 2, which was approved in May 2015, sets all-weather upgrade targets for rural access roads totalling 2548 km, as well as upgrades across 118 km of national roads. Tranche 3, worth an estimated $200m, will provide financing for the second group of projects located in the Southern, Sabaragamuwa, Central, North Central and North Western provinces, and the Kalutara District of Western Province. The ADB has also proposed rolling out the $500m Expressway Connectivity Investment Programme to improve efficiency along southern roads.
Railways
Outside of national highways, the government is also keen to rehabilitate and improve nationwide railways services. Although SLR once played a dominant role in the country’s transport sector, its share in passenger and freight transport now only accounts for 8% and 5%, respectively.
In October 2014 The Economist reported that north-south lines recommenced services for the first time after being suspended for 24 years as a result of ongoing civil conflict. Apart from its planned rail projects in Colombo, the government is also hoping to rehabilitate the country’s dilapidated railway network, and SLR is in the midst of an ambitious expansion strategy encompassing six primary targets. These aims include: increasing train speeds from 80 km per hour (km/h) to 100 km/h; constructing 195 km of new rail line to add to the country’s existing 1422-km network; increasing its rolling stock fleet with the addition of 33 new diesel multiple units (DMUs), nine new locomotives, two train sets, 24 tank wagons and 52 service wagons; rehabilitating the signalling and telecommunication network; electrification of 120 km of track; and upgrading IT systems. The World Bank reports that the country plans to establish internal container depots along rail lines in partnership with the SLPA and private players to reform its rail system and increase cargo volumes.
According to the Annual Performance Report of SLR for 2014, revenue for SLR increased by an average of 10% every year from 2009, however, there had also been an increase in operating expenditures driven by wage increases. The SLR fleet included 65 engines, 77 DMUs, 565 carriages and 862 wagons in 2014. As a result of government efforts to modernise the fleet, engine failures declined from a high of 660 in 2011 to 530 in 2013 and 503 in 2014.
SLR carried approximately 129.5m passengers in 2014, up from 106m in 2012, and the opening of the northern line and other extensions helped improve access for many people in Sri Lanka. Additionally, for freight alone, SLR’s net profits were around LKR500m ($3.6m) with 1.6m tonnes transported in 2014. Freight included cement (62%), petroleum products (37%) and agricultural products (1%).
Airports
Sri Lanka is home to three international airports. These include BIA, MRIA and Ratmalana Airport – which is a smaller facility located in Colombo that had previously acted as the country’s main international aviation hub. The country’s domestic airport network is overseen by the Sri Lankan Airforce and extends to 14 cities, which include Kandy, Jaffna, Galle, Trincomalee and Kalutara, none of which currently operate commercially.
Sri Lanka’s present-day international aviation hub, BIA, is located in the town of Katunayake to the north of Colombo. The airport serves as headquarters for national carrier SLA, as well as national low-cost carrier Mihin Lanka, in addition to hosting approximately 30 major international players such as AirAsia, Indian Airlines, Qatar Airways, Cathay Pacific Airways, Emirates and Turkish Airlines. The first international airport in the country, BIA opened in 1967 and had an annual capacity of 8.5m passengers in 2015. In addition to passenger services, BIA has also been a popular cargo port for decades, serving Lufthansa, Emirates and China Airlines, although at present the largest active freight carrier at the airport is MidEx Airlines. The airport offers one passenger terminal and a single runway at present, although rising passenger volumes will see new facilities added in the coming years. The airport operated well above capacity in 2014, with the AAS reporting a 6.1% increase in total passenger traffic to 7.78m, while total flight movements rose 5.7% to reach 54,960.
Capacity Upgrades
Although diverting steadily rising air traffic from BIA to the recently opened MRIA represents the most viable long-term solution to capacity constraints at BIA, MRIA does not benefit from supporting infrastructure at present (see analysis) and has failed to meet passenger targets, with nearly all airlines moving to halt services to the airport since it opened as a result of low demand.
In the interim, the government is continuing to move ahead with ongoing expansions at BIA, which are expected to boost total capacity to 15m passengers annually. The airport expansion plan’s second phase, which entails Japanese-financed construction of a new two-storey passenger terminal with separate arrival and departure areas, was officially launched at a high-profile ceremony attended by Japanese Prime Minister Shinzo Abe in September 2014.
In early 2016 The Japan International Cooperation Agency loaned $400m for the construction of the multi-level terminal, and construction is expected to finish by the end of 2020. The new terminal will also featuring a rapid exit to the Colombo-Katunayake Expressway. Coupled with ongoing restructuring of SLA, the national carrier could be set to benefit from rising passenger numbers and a brighter mid-term future after suffering years of losses (see analysis).
Outlook
Although a number of recently completed transport projects in Sri Lanka have been dubbed white elephants, and have so far failed to meet their targets, the country’s strategic location along critical global routes should see underperforming projects achieve long-term profitability.
At the same time, the government’s rising focus on private sector investment in delivering a host of internal transport projects, both within the CMR and across the nation’s network of national highways and railways, has created significant new opportunities for foreign investment in the sector.
As the country moves to enhance bilateral trade ties with India and the West, foreign investors are poised to benefit from a widening array of new opportunities across all transport segments, while residents and industry will most certainly benefit from the improved domestic and international links.
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