Sri Lanka

Sri Lanka has a history of public–private partnerships (PPPs) from the 1990s, which have resulted in 179 financially closed projects valued at an excess of $5.3 billion.1 However, the success of the institutional frameworks surrounding these PPPs has been more mixed and hampered by two related problems: (1) the preference for public-funded infrastructure projects resulting in the gradual erosion of the PPP institutional framework and (2) halting and inconsistent attempts to rebuild a single, comprehensive PPP framework.

Sri Lanka’s initial PPP framework was formulated during the early 1990s, when the government was faced with budgetary constraints due to the civil war. During this time, the Bureau of Infrastructure Investment (BII), under the Board of Investment of Sri Lanka (BOI), was operationalized as the agency responsible for promoting, coordinating, facilitating, and implementing infrastructure projects as PPPs. The 1998 Guidelines on Government Tender Procedure—Part II: Private Sector Infrastructure Projects on Public–Private Partnership Basis (i.e., 1998 PSIP Guidelines) provided the legal basis for the development and implementation of PPPs.2 The guidelines were amended through supplements to include the following:

• A mechanism for handling unsolicited proposals. 
• The introduction and subsequent removal of the Swiss challenge process of procurement (refer to Definition of Terms). 
• The replacement of the BOI and the BII with the National Agency for Public–Private Partnership (NAPPP) as the main government agency facilitating interests in the Sri Lanka PPP environment.

During 2005–2015, the Government of Sri Lanka (GOSL) favored funding major infrastructure projects through public financing and PPPs remained on the backburner. The BII, which was set up for PPP project implementation was gradually made nonoperational and ceased to exist in 2006.3

In 2016, however, due to increasing fiscal constraints, the GOSL revisited PPPs as an alternative procurement option for infrastructure projects. With the support of the World Bank, the GOSL began developing a new PPP framework, and the PPP unit was established in January 2017 and the NAPPP in July 2017. This agency was created as an independent institution designed to select and implement PPP projects and to provide guidance to the line ministries and agencies in respect of PPPs. The NAPPP developed draft PPP Guidelines in 2018 to provide the legal basis and a new legislative framework for PPP implementation in Sri Lanka. Once approved by Cabinet, these draft PPP Guidelines were expected to replace the 1998 PSIP Guidelines; however, the draft PPP Guidelines never received Cabinet approval, and the 1998 PSIP Guidelines continue to govern PPP implementation.

To expedite Cabinet approval of the draft PPP Guidelines and to operationalize the new PPP legal and regulatory framework, discussions were held again in June 2019, this time with the participation of National Procurement Commission officials. Various modifications of the policy and guidelines were identified, and the issue of ownership of the guidelines was discussed. However, following a change in government in early 2020, the NAPPP was made nonoperational, and the individual line ministries and public agencies were given the responsibility of handling the PPP process independently, without a centralized custodian of PPPs.4

To support the development of robust and sustainable PPPs and meet the International Monetary Fund requirements of improved governance and transparency, the national budget presented to the Parliament in August 2022 proposed the re-establishment of the NAPPP to identify and facilitate PPP investments and the establishment of the State-Owned Enterprise Restructuring Unit (SOERU) to facilitate the restructuring of government-owned business entities.5 Both entities were established in the fourth quarter (Q4) of 2022 and made operational via Cabinet approvals.

The NAPPP, established under the Ministry of Finance (MOF) will serve as the central agency to support all PPP projects in the country. According to the Public Finance Circular No. 2/2019, NAPPP functions include the following:

• Act as a facilitator in implementing PPP projects by government institutions.
• Identify and structure suitable PPP projects for government institutions.
• Prepare required guidelines for PPP projects with the concurrence of the National Procurement Commission.
• Assist line ministries and government agencies to invite bids, evaluate, negotiate, and select investors.
• Assist line ministries to procure required local and international experts to carry out pre-feasibility studies and procurement of transaction advisors for PPPs through funding from the World Bank made available to the NAPPP.

While the execution of PPP projects remains the responsibility of individual line ministries, NAPPP’s role is to oversee the entire PPP project lifecycle, from initial screening and preparation to tendering and execution. As part of its mandate, NAPPP will also play a crucial governance role by enforcing PPP legislation, operational guidelines, and regulatory frameworks as well as developing a national PPP project pipeline and providing guidance to line agencies on screening processes and capacity-building efforts. In line with its mandate, NAPPP is currently in the process of drafting a new PPP law.

Meanwhile, SOERU, which is also established under the MOF, is working toward implementing strategic economic reforms to state-owned enterprises (SOEs) to enhance competition, productivity, and efficiency across the economy. The SOERU has appointed consulting firms to provide transaction advisory services to divest four state-owned entities operating in the insurance, petroleum, leisure, and real estate.6 Meanwhile, the divestment of three state-owned entities operating in healthcare, telecom and airlines is also being handled by government-appointed transaction advisor, the International Finance Corporation (IFC).

Value of Projects with Foreign Sponsor Participation Relative to Total Value Invested, 1990–2023 (%)

While existing projects demonstrate Sri Lanka’s capacity to implement sustainable and efficient PPPs, several challenges remain. The Infrascope index, which evaluates the capacity of countries to implement sustainable and efficient PPPs, ranks Sri Lanka as an “emerging country” with good operational maturity and developing regulations, financing, and institutions. However, evaluation of the investment and business climate is less positive, especially due to the volatility and uncertainty of national policy surrounding PPPs.7

Furthermore, the report titled “Procuring Infrastructure Public–Private Partnerships” published in 2018 by the World Bank Group scored Sri Lanka high (76/100) for its current PPP procurement processes and the availability of a comprehensive regulatory framework to facilitate unsolicited projects. The report highlighted that Sri Lanka was the only country in South Asia with the presence of a reasonable standstill period in the PPP procurement process; which makes it possible for the unsuccessful tenderer to examine the validity of the award decision as well as any flaws that may have occurred during the evaluation process.

However, the report identified significant shortcomings in the initial PPP project preparatory process and contract management. Transparency gaps were identified in the failure to publish the grounds for awarding contracts to winning bidders, leading to time consuming and impractical challenge procedures from unsuccessful bidders, and more importantly delaying the overall implementation of PPP initiatives. The lack of regulation pertaining to PPP contract termination was also identified.8

Sri Lanka’s most pressing issue is the absence of a comprehensive, national PPP policy that sets out the overall direction and assures the private sector of the GOSL’s commitment to the PPP program. Without an updated, comprehensive framework, PPP projects in Sri Lanka face three key problems:

• Projects may tie up resources without consideration of the need for national and sector development priorities. In the absence of a PPP policy framework, public sector agencies tend to consider PPPs as a procurement mode solely for projects that do not receive public funding, and which are initiated through private developers and through unsolicited proposals. As a result, PPP projects are identified and procured in an unstructured manner and without an adequate assessment of service needs, national and sector development priorities, and plans.
• The lack of a proper screening framework results in unstructured and inefficient projects introduced to market as PPPs. Since the public sector has limited capacity to identify, screen, prioritize, prepare, procure, and manage PPP projects efficiently, this has resulted in suboptimal quality of projects at an entry level and led to the country having an outdated PPP project pipeline.
• Potential projects may not get funding due to the lack of government support since there is no dedicated viability gap funding mechanism and framework for managing fiscal commitments and contingent liabilities from PPP projects.

Another challenge to the effective expansion of PPPs is the inadequacy of dispute resolution mechanisms. Apart from power, which has a relatively long history of PPPs, other sectors lack operational experience of the domestic legal system to handle long-term contracts and dispute resolution, which decreases willingness to engage in PPP projects.

Finally, PPPs are hindered by (1) funding constraints—lack of alternative financing mechanisms due to the existence of underdeveloped finance markets, limited access to capital, constrained bank lending due to single borrower limits, and a less mature bond and capital market, and (2) regulatory constraints—high transaction costs, nonavailability of asset recycling/monetization instruments, land value capture mechanisms, and the lack of a developed currency hedging market and guarantee products.

Sri Lanka’s infrastructure projects have been financed mainly through public funds and debt or grants from development financial institutions and government-to-government initiatives in the past few years. This approach is not sustainable, given the current fiscal constraints of the country. There is a significant need for investment in PPP-based development and maintenance in areas such as roads, rail, urban transport, education, social infrastructure, healthcare, water, and waste management. Although Sri Lanka has historically witnessed volatility in the PPP-enabling environment, recent developments proposed in the Interim Budget 2022 and subsequent developments can be considered positive initiatives.

• 1Approximate total value taken, based on publicly available information, does not take into consideration the value of two new IPP thermal power plants added to grid as per CEB Statistical Digest 2023.
• 2Government of Sri Lanka, Ministry of Finance. 1998. Guidelines on Government Tender Procedure—Part II.
• 3Asian Development Bank (ADB). 2006. Sri Lanka: Private Sector Development Program Loan.
• 4Sri Lanka National Procurement Commission. 2019. Progress Report for the Second Quarter of the Year 2019.
• 5The Parliament of Sri Lanka. 2022. Interim Budget Speech—2022.
• 6Approximate total value taken, based on publicly available information, does not take into consideration value of two new IPP thermal power plants added to grid as per CEB Statistical Digest 2023. Ministry of Finance, Economic Stabilization & National Policies. 2022. State Owned Enterprise Restructuring Unit. https://www.treasury.gov.lk/web/sru/section/divestitures (accessed July 2024).
• aProjects under these two sectors were only considered as per World Bank PPI database.
• 7Economist Intelligence Unit. 2019. The Infrascope index.
• 8World Bank. 2018. Procuring Infrastructure Public–Private Partnerships Report.