As the number of private vehicles on the road in Colombo continues to grow, travelling even 20 km by car can take up to two or three hours. Traffic congestion has become a serious issue, leading to a number of problems such as long transit times, environmental pollution, loss of productivity and decreased quality of life. Heavy traffic jams are therefore considerable economic and social problems for Sri Lanka.

In an effort to address these issues and to modernise the capital city, in early 2019 the Cabinet gave approval to begin building the Colombo Light Rail Transit (LRT) network, with construction expected to start at some point the same year.

Foreign Participation

Once complete, the LRT network will stretch over a distance of 17 km, with 16 stations covering Borella, Rajagiriya, Battaramulla and Thalahena areas in the Western Province. It is estimated that with the LRT system in place, the number of passengers using the main public transit corridors in the Colombo Metropolitan Region will rise from 1.9m to 4.5m per day by 2035.

According to the blueprint published by the Ministry of Megapolis and Western Development, this project is part of the Western Region Megapolis Transport Master Plan that aims to improve public transport in the Western Region before 2035. Colombo and the surrounding area have suffered from chronic congestion, with 10m passengers travelling in and out of the metropolitan region, and 2m passengers entering the city on a daily basis. The Cabinet granted approval to a proposal from the Ministry of Finance and Mass Media to initiate negotiations with the Japan International Cooperation Agency (JICA) for a loan to finance the project. The proposed loan will be for $1.7bn, with a 0.1% interest rate, a 40-year repayment term and a 12-year grace period.

Construction is set to cost around $6bn and will be divided into seven phases. In late 2018 a proposal by the Ministry of Megapolis and Western Development was approved by the Cabinet for six Chinese companies to build three LRT lines. The companies involved were each individually assessed and endorsed by the Procurement Committee, and approved by the Cabinet Appointed Negotiation Committee.

Financing Challenges

As the country’s debt has ballooned in recent years, Sri Lanka has struggled to repay foreign loans, and the government is scheduled to reimburse a total of $5.9bn of foreign debts in 2019. However, in early 2019 the government had difficulty raising $1.9bn to help repay a debt payment of $2.6bn. Consequently, rating agencies such as Moody’s, Fitch and Standard & Poor’s downgraded Sri Lanka from “B+” to “B” on the basis of refinancing risk and an uncertain policy outlook.

The financial instability of the country could damage its ability to borrow money to finance ambitious infrastructure and transport projects. As a middle-income country with high debt exposure, Sri Lanka is finding it increasingly difficult to acquire loans with low interest rates, and the recently depreciating rupee could make it harder to repay debts. The government will enter in talks with the JICA in early 2019 to discuss a loan meant to finance the first phase of the LRT project. However, it might prove increasingly difficult to raise sufficient funds to complete the project beyond this phase.

Another risk arises from Sri Lanka’s strong reliance on China for its infrastructure-related projects. The state-owned shipping conglomerate China Merchants Port Holdings Company has already taken majority control of the deepsea port in Hambantota in exchange for debt alleviation.

If the Sri Lankan authorities are able to successfully negotiate these hurdles, the benefits could be numerous and substantial. Not only should the LRT project help solve the problem of heavy congestion, increasing productivity and quality of life, it may also enhance the city’s overall attractiveness to investors.