Questionable G2G infrastructure deals deepened SL debt crisis: Economists

• University of London Economists in new study say weak procurement, political deals and mispricing, not macro shocks, drove much of SL’s external debt
• Urge reforms that draw competitive bidders, avoid Govt. to Govt. deals and reduce incentives for collusive pricing
• About 65% of foreign debt was spent on transportation, power, energy, water and airport projects

Sri Lanka’s debt crisis was driven less by macroeconomic shocks than by years of inflated, non-competitive Government-to-Government infrastructure contracting, with the cancelled Adani Mannar wind project serving as an example, economists from SOAS University of London warned.

The now-abandoned 250 MW Adani project in Mannar, they said, encapsulated the governance failures tied to Sri Lanka’s borrowing.

SOAS University of London Professor of International Economics Dr. Pallavi Roy said the tariff proposed for Sri Lanka was about 120% higher than a comparable 300 MW Adani wind project in Gujarat, even though Mannar has significantly stronger wind resources. 

She was speaking at a recent forum organised by the Open Society Forums to present a new study on “Can Good Governance Tackle Bad Debt? The Political Economy of Public Debt Management” which covered Sri Lanka and Bangladesh.

“On technical grounds, one would have expected the unit cost of electricity in Sri Lanka to be lower,” she said. “But we observed completely the opposite.”

Roy’s team benchmarked the Sri Lanka tariff at more than double the Gujarat reference price. After adjusting for Mannar’s superior wind intensity, they estimated the ideal tariff should have been closer to one-third of what was proposed. 

She said the excess mark-up was “staggering” and warned that the fully dollar-denominated tariff would have shifted substantial foreign-exchange risk onto Sri Lankan households.

University of London Economist Dr. Ulrich Volz said such projects were central to the country’s debt dynamics. 

“About 65% of foreign debt was spent on transportation, power, energy, water and airport projects,” he said. 

“A lot of the external debt that contributed to the crisis was directly linked to infrastructure investment.” Mismanagement and non-competitive procurement, he added, had undermined public trust and weakened tax compliance. “People do not want to pay taxes when they feel money is not used wisely.”

SOAS University of London Economics Professor Dr. Mushtaq Khan argued that while transparency, audits and governance diagnostics are important, they are insufficient in political economies where the actors expected to enforce rules lack incentives. 

“They are not sufficient, and the global evidence is very strong that they are not sufficient,” he said. Khan said Sri Lanka needs what he calls “horizontal checks” – pressure from firms, communities or other groups with the power and self-interest to force compliance. 

“The idea that transparency will trigger action is a wrong assumption,” he said. “It will only trigger action where you have powerful horizontal checks.”

He cited examples from Bangladesh, where introducing a financing line that reduced political risk for unconnected investors significantly collapsed collusive prices in the power sector. Such mechanisms, he argued, can break cycles of inflated bidding if designed properly.

For Sri Lanka, governance diagnostics and procurement guidelines will not prevent another overpriced megaproject unless tenders are structured to attract genuinely competitive firms, Government-to-Government deals are avoided, and project design gives local actors a stake in ensuring quality. 

“Without this,” Khan warned, “Sri Lanka will once again lock in inflated costs that feed foreign debt and expose citizens to avoidable financial risk.”