Transport Infrastructure: Opportunities Still Abound
BMI View: The end of Sri Lanka's 25-year civil conflict in May 2009 has seen the government turn its attention towards upgrading the country's war-torn infrastructure. Although investors have moved in swiftly to take up these infrastructure projects, we believe that there are still several opportunities for transport infrastructure investment in Sri Lanka, particularly in ports and airports.
The end of Sri Lanka's 25-year civil conflict in May 2009 has seen the government turn its attention towards upgrading the country's war-torn infrastructure. This has created numerous opportunities for foreign investors to invest in the country's infrastructure, and they have embraced it with a vengeance.
|Charting The Boom|
|Sri Lanka - Net Foreign Direct Investment, US$mn|
The recent boom in foreign direct investment (FDI) into Sri Lanka has been nothing short of spectacular, with annual net FDI reaching an all-time high of US$896mn, surpassing the previous record of US$691mn in 2008. Project opportunities have been the key driver for this sharp increase in FDI, as the government has been actively promoting investments in infrastructure by offering numerous incentives ( see our online service, January 18 2011, 'Thai Construction Companies Show Prudent Interest In Sri Lanka').
|Sri Lanka - Real Construction Industry Value Data|
This dramatic increase in FDI has seen construction activity reach record-highs over the past two years, indicating that a sizeable number of infrastructure projects have started construction. This, however, does not mean that there are limited opportunities in infrastructure. Sri Lanka still suffers from significant deficits in infrastructure, particularly in airports and power plants as indicated by the World Bank's Global Competitiveness Report. In this analysis, we would highlight some of the opportunities and current developments in the various transport infrastructure sectors.
|Rank/133 in 2009/10*||Rank/139 in 2010/11**||Rank/142 in 2011/12***|
|*Rank out of 133 countries in 2009/10. ** Rank out of 139 countries in 2010/11 ***Rank out of 142 countries in 2011/12. Source: World Economic Forum, Global Competitiveness Report 2009/10 and 2010/11|
|Quality of Roads||60||55||49|
|Quality of Railroad Infrastructure||44||40||37|
|Quality of Port Infrastructure||43||44||45|
|Quality of Air Transport Infrastructure||64||62||60|
|Quality of Electricity Supply||72||76||62|
|Quality Of Overall Infrastructure||63||61||48|
Ports: Importance Derived From Trade
Sri Lanka's strategic location on the major East-West trade lanes, as well as its proximity to the massive and expanding Indian economy, makes it ideally suited to develop a vibrant export sector and be a transhipment hub for shipping companies. Following the end of the civil war, Sri Lanka's total trade of goods grew by 55% in 2010 and 101% in 2011, whilst balance of trade in services (which includes transhipment services) grew by 81% in 2010 and 55% in 2011. Although the slowdown in global trade activity has dampened Sri Lankan trade in recent months, we expect the country's trade for goods and services to rebound sharply to around 12.0% and 26% respectively over the coming years.
|Driving Demand For Ports|
|Sri Lanka - Total Trade In Goods And Services, % chg y-o-y|
This export potential makes it vitally important to Sri Lanka's economic well-being, and the government has given the highest priority to the development of ports in the infrastructure sector. The government is currently aiming to attract US$5bn worth of foreign direct investments from the ports sector by 2014. These investments would be channeled into the development of six ports - Colombo, Hambantota, Galle, Trincomalee, Kankasanturai and Oluwil. The Colombo and Hambantota hubs are already being expanded, with Chinese port operator China Merchants Holdings International set to start the first phase of the US$500mn Colombo South Harbour expansion project.
|Sri Lanka - Location Of Key Port Developments|
Meanwhile, the Hambantota hub has recently completed the new Ruhunu Magampura International Port and is already providing transshipment services for vehicles ( see our online service, June 8, 'Vehicle Tran shipment Boost For Hambantota'). The Hambantota port authorities are also planning to offer bunkering services at the port and is waiting to secure an oil import license ( see our online service, July 25, Ports Sector Developing Rapidly').
Another major port investment is the development of Trincomalee into a port city. In June 2012, the Sri Lankan government signed a US$4.0bn deal with foreign-owned Sri Lanka Gateway Industries to build port-related heavy industries around the Trincomalee harbor. The three-phase project is the largest overseas investment and will involve the construction of a deep water jetty, bulk commodities terminal with stockpiling and blending capabilities, a power generation plant and related industries.
Airports: Necessary For Tourism
The end of the civil war saw tourists flocking back to Sri Lanka, and the tourism sector is becoming increasingly important to the country's economic well-being. The total number of tourists visiting the country rose by 31% in 2011 to reach 855,975 arrivals, while earnings from the tourist industry surged by 44% to reach US$830mn. These elevated levels have continued into the first six months of 2012 despite the slowdown in global economic activity, suggesting that tourist arrivals could remain at the record-levels seen in 2011. The Sri Lankan government is aiming to attract 2.5mn tourists per annum by 2016 and achieve US$2.5bn in revenues from the tourism sector by 2016.
|A New Normal?|
|Sri Lanka Monthly Tourist Arrivals|
These aggressive targets, which look increasingly attainable, would dramatically increase the demand for airports, the main point of entry for tourists. At present, Sri Lanka has 18 airports, but only one of them - the Bandaranaike international airport in Colombo - is able to handle international flights.
The country has recognised its deficiency in airport capacity and is currently carrying out a US$500mn expansion of the Bandaranaike airport. The expansion project is financed by the Japanese government and is expected to be completed by 2016. Sri Lanka is also developing a second international airport near Hambantota - scheduled to be operational by 2013 - and has plans to turn the Ratmalana domestic airport in Colombo into another international airport. Other airports such as the Koggala and Jaffna airports are also expected to be upgraded to boost their capacity for domestic flights.
|Driving Airport Demand|
|Sri Lanka Annual Tourist Arrivals|
Roads: The Main Mode Of Transport
Roads are used heavily in Sri Lanka for land transport. We estimate that roads account for around 93% of all land transport in the country, while railways account for the remaining 7%. Despite this reliance on roads, the World Bank reports that more than 50% of Sri Lanka's national roads (ie, expressways and highways) have poor surfaces, and many suffer serious congestion. The condition of roads is far worse in rural areas, where up to 85% of the population lives.
This need to improve road infrastructure has prompted the government to focus most of its infrastructure spending on the sector. In July 2012, the Sri Lankan finance ministry reported that the government had spent LKR70bn (US$529mn) on highways, power and water-related facilities in the first five months of 2012, with around 70% of the funds channeled into roads.
|Source: BMI, Sri Lanka Finance Ministry, Lanka Business, Online|
|Power, Water, Sanitation||20|
Although quite a sizeable portion of the spending was used for rehabilitating roads damaged during the civil war (ie, spending on road improvements and provincial roads), the majority of the funds were actually spent on developing new expressways and expanding existing national roads. The funds for these projects are mainly used to develop links that boost Colombo's access to the rest of the country and are provided to the government by overseas sources such as the Asian Development Bank (ADB), Japan, and lately, China. The ADB, for example, is the main financer of the 110km Colombo-Kandy expressway, while China is the main financer of the 26km Colombo-Katunayake highway. In fact, one of the largest road projects in Sri Lanka is the Northern Expressway project. The multi-billion dollar project is aimed at connecting Colombo with the northern provincial capital of Jaffna.
|Boosting Access To Colombo|
|Sri Lanka - Location Of Northern Expressway project|
Railways: Opportunities Lie Around Cities
Sri Lanka has not focused as much on railway infrastructure as other infrastructure sectors. We believe this is because the current network (1,449km) is in relatively good condition and that there is a bias towards road transport within the country. At present, most of the railway investment in Sri Lanka involves rehabilitating lines damaged during the civil war, but there are plans to boost rail access to airports and ports in key cities.
Since the start of 2012, the Sri Lankan government has been constructing the first phase of the Matara-Hambantota-Kataragama railway line. The 114.5km project, which is financed by the Chinese government, will extend the country's southern coastal railway line to the key port city of Hambantota. Sri Lanka is also planning to develop a high-speed railway line between the Bandaranaike international airport and Colombo. The project is currently undergoing pre-construction activities and could start construction works in 2013.