Infrastructure projects – Good ones and bad ones

Situated at the southern tip of the country with the least deviation time from the shipping lane, the economic case for a port in Hambantota should be compelling. As in the case of Norochcholai Power Plant, the teething issues of infrastructure projects at the beginning is nothing uncommon. However it may also be true that the execution of the project could have been better in terms of generating investments more swiftly

A top Government official recently said: “The planned Light Rail Transit (LRT) system in Colombo will need Government subsidies and Sri Lanka should also look at other options such as improving the bus service.” If this is a precursor to abandoning this project, it would be a shame. The project which was talked about for years, is yet to see physical progress on the ground. 

Infrastructure projects need to be evaluated rationally

What is equally troubling is the above myopic manner in which the infrastructure investments are evaluated. For instance, let’s do a simple analysis. Sri Lanka has spent $ 4.8 b up to October for vehicle and fuel imports. Although this was possibly an exceptional year, on average Sri Lanka would spend close to $ 4 b for vehicle and fuel imports annually. 

One could argue that the vehicle and fuel import bill could reduce by 5% with a strong transport network in Colombo. Hence the annual saving on vehicle and fuel imports will be close to $ 200 m. In comparison, the capital cost of the LRT project is quoted as $ 1.2 b. Hence the capital cost would be recovered in six years simply through the reduction in vehicle imports, without even considering the direct income from the LRT. 

One should note that although a developed state, most in Singapore don’t own a vehicle as they possess an excellent MRT system. They have an excellent bus service as well, but that didn’t prevent them from setting up an MRT way back in 1987. 

 

Myopic evaluation of infrastructure projects

The key factor is, infrastructure projects should not be evaluated on a primitive, standalone basis. Such techniques would eventually result in wrong investment decisions. In this scenario, if one just evaluates the income from the LRT and compares it with the capital cost, the conclusion would be the need for subsidies and the adverse impact on the Government budget deficit. 

However the positive impact on the external current account is completely ignored. In fact, the policy makers need to understand that in Sri Lanka’s case, the more problematic is the external current account deficit and not the Government budget deficit, which seems to be overlooked by many economic experts.

 

Prime example of Norochcholai Power Plant

Being critical of logical infrastructure projects is not something new in Sri Lanka. The prime example is the Norochcholai Power Plant. No less than the outspoken Auditor General pointed out that this project is the best example of financially lucrative public investments and the income so far is over 10 times the investment cost. Although Sri Lankans have short memories, one cannot forget the level of public criticism that was levelled during the early days of this project. Initial failures are what is called “teething problems” in these long-term infrastructure projects. 

As a developing country which is striving for investments, having a low cost, reliable power supply is of critical importance for Sri Lanka. Therefore, setting up coal power plants was a relatively straight forward investment decision. The cost of production of a unit of electricity is less than Rs. 10 in the case of coal, while the expensive thermal power plants cost over Rs. 30. 

Citing environmental concerns, Sri Lanka has abandoned coal power plants since 2015 and the electricity production costs have spiked in recent years. With annual per capita CO2 emissions less than 1 (2014 data), Sri Lanka’s environmental concerns are non-existent. In comparison, China is at 7.5, India 1.7 and USA 16.5. Not proceeding with low cost power plants which has tremendous economic and financial benefits due to non-existing environmental concerns is yet another case of poor prioritisation in the case of Sri Lankan policymakers. 

 

Even best business ideas have risks

The much-debated-about Hambantota Port is another interesting case. Arguably, Sri Lanka’s most competitive advantage is its location, in the middle of Malacca Strait and Suez Canal (two of the four busiest shipping routes in the world). Situated at the southern tip of the country with the least deviation time from the shipping lane, the economic case for a port in Hambantota should be compelling. As in the case of Norochcholai Power Plant, the teething issues of infrastructure projects at the beginning is nothing uncommon. However it may also be true that the execution of the project could have been better in terms of generating investments more swiftly.

Lee Kuan Yew has stated that the Jurong Industrial Estate was empty in the 1960s despite vast sums spent on infrastructure. The break has come in 1968 with Texas Instruments and Jurong had become vibrant by 1975. Anyone who has embarked on a business could relate to risks involved with even the most logical of business ideas. At the same time, even the most compelling business ideas could be criticised by critics (who may not have ever taken a business risk) who could find enough reasons as to why the business idea shouldn’t be pursued.

Faulty infrastructure investments

While the above mostly focuses on cases where Sri Lanka criticised much-needed infrastructure projects, the opposite is true too. Sri Lanka has embarked on economically-senseless infrastructure projects. 

A good example is the proposed railway line between Kurunegala to Habarana. It is difficult to comprehend the economic rationale in this, while the cost is estimated at $ 1 b. The recovery of that investment could take a very, very long time. Even more depressing would be to note that the proceeds of sale of Hambantota Port (of around $ 1 b) would be utilised for this – more like giving away an uncut diamond for a polished brick.

 

Infrastructure – not the critical component of development

While infrastructure development is an integral part of economic development, it is not the most critical part. Developing industries and SMEs which provide employment and an improvement in household income and an advancement in global value chain should be priority. Development of infrastructure should be to facilitate such development of industries. 

For that reason, while one could commend the development of projects such as Norochcholai Power Plant and Hambantota Port, a project such as the Southern Expressway could be considered as premature. It is true the project is generating sizeable income (which could be a sufficient justification for a primitive investment analyst), however instead the resources and investment could have been diverted to develop industries and SMEs which would have resulted in a more balanced development of the economy. Hopefully that lesson was taught by the voting public.

(The writers can be contacted via [email protected])