Major new projects pique investor interest in Sri Lanka's construction sector


Across the island, a wide-ranging infrastructure development campaign is unrolling to expand Sri Lanka’s production capacity, efficiency and productivity, with the added aim of reducing regional disparity. Building and infrastructure projects are expected to strengthen the country’s economy, with the ultimate aim of achieving high-income, sustainable economic growth for all Sri Lankans. Various programmes are set to span the entire spectrum of infrastructure assets, encompassing transport, housing and urban development, hospitals, water supply and sanitation, and industrial areas including warehouses and logistic centres. In addition, the government is tendering a large number of land banks to private industry players for development. These consist of large parcels of land to be developed for housing and recreational activities.

Globally, in the World Bank’s “Doing Business 2017” report Sri Lanka ranked 88th out of 190 economies for dealing with construction permits, an significant improvement over its 2015 score of 106. The improvement was attributed largely to a streamlined internal review process for building permit applications, which led to a reduction in the time required to deal with construction permits. The construction sector is therefore primed and ready for a brisk and extended period of expansion, as mega-development projects enter beginning stages. In addition, the construction of highways and expressways, airports and sea ports, urban development projects, and residential and commercial construction activities all bode well for the health of the sector overall.

Skilled Management

The government has conferred the bulk of responsibility for developing and promoting Sri Lanka’s construction industry on the Construction Industry Development Authority (CIDA). With its ultimate objective being to foster sustainable national development, CIDA’s membership of contractors, construction professionals and labourers makes it an established stakeholder in the industry. The authority is aiming to cultivate a professional and competitive domestic and global construction sector by regulating the industry, facilitating the acquisition of construction resources and promoting quality standards. Complementing CIDA’s work are the Ministry of Housing and Construction, the National Housing Development Authority, the State Development and Construction Corporation, the Central Engineering Consultancy Bureau, the Urban Development Authority (UDA) and the Lanka Building Materials Corporation. Certain areas have specialised management organisations. This is specifically true for the Western Province, to which the Ministry of Megapolis and Western Development (MMWD) is dedicated to planning and developing a 500-acre city and financial centre on the waterfront in Colombo. These are overseen and directed by the four committees of experts under the Western Region Megapolis Planning Project (WRMPP).

Institutions devoted to building the industry’s labour workforce include the Vocational Training Authority, which provides training and financial assistance to small business entrepreneurs; the Sri Lankan arm of the International Labour Organisation; the National Apprentice and Industrial Training Authority; and the University of Vocational Technology.

Growth Resumes

The construction sector has become a major contributor to Sri Lanka’s GDP. In 2014 it contributed 9.9% to GDP, and grew by over 20%. In 2015 growth paused temporarily when some larger infrastructure projects were suspended as the new administration reviewed costs and environmental impacts. The sector’s overall contribution to GDP at constant prices eased to 6.9% in that year, totalling LKR595.1bn ($4.1bn), according to official data from the Central Bank of Sri Lanka.

With most of the stalled projects now back on-line, and with other new projects either slated for launch or under way, the sector contributed 7.6% to GDP in 2016, marking the reinvigoration of the construction industry. Increased high-rise construction in the hotels, shopping malls and office space segments has been driven by a growing number of tourist arrivals, according to a report by investment advisory and financial planning firm First Capital Equities. The brokerage also forecast that the WRMPP would act as an additional accelerator to the construction sector’s growth.

The Sri Lankan construction equipment market also appears to be set for substantial growth over the next five years, according to research and analysis consultancy Off-Highway Research. The group’s “Construction Equipment Industry in Sri Lanka” report looked at the country’s programme of infrastructure investment and determined that the construction equipment market would grow in the near term. Crawler excavators, backhoe loaders and compaction equipment were called out as volume markets leaders. The study forecast sales in compaction equipment would double by 2020 and hydraulic excavator sales would climb to 345 units in 2020, from 245 in 2016.


This growth is expected to continue. In the government’s 2017 budget speech, it was estimated that the construction industry’s value will total LKR6.5trn ($44.3bn) in the next five years. Additionally, to compound its advantages, the government proposed several stimulating measures. Sizeable road and housing projects, beneficial regulatory amendments and the Payment Guarantee Security Act could all work to the advantage of the country’s construction sector. Also proposed was an incentive package with tax concessions for landmark investments of between $100m and $500m, and for those of $500m and more.

A proposal to remove the 25% tax on pre-fabricated structures should also help improve construction-sector earnings, according to First Capital Equities. Also, in the pipeline are government-proposed housing projects. These would see 100,000 homes each worth LKR5m ($34,000) built for middle-income earners and 250m homes each worth LKR1m ($6,820) built for the low-income segment. According to the budget speech, the government would provide the necessary land and amenities free of cost for these projects in an attempt to address housing shortages.

Overcoming Constraints

In order to fulfill its engineering potential domestically and globally, new solutions will be required. “The sector faces two major obstacles to growth; a shortage of technical, skilled and unskilled labour, and the lack in the backward integration of the building sector, both of which are now being imported as a short-term remedy,” Jehan Amaratunga, executive deputy chairman of integrated engineering and infrastructure solutions provider MTD Walkers told OBG. For the last decade about 7% of the workforce has been engaged in construction or construction-related employment. Sri Lanka’s universities and technical institutes, such as the Institution of Engineers Sri Lanka – the country’s professional body for engineers – produce highly trained engineers and technical professionals. However, there is a shortage in programmes for specialists such as masons, carpenters, electricians, machine operators, and so forth, and the country’s professional engineering bodies need to spend more on training adequate specialists as the demand for buildings in Sri Lanka is rising steeply. For the building sector to be functional, construction companies require large numbers of such specialists.

Foreign construction companies operating in the country have resorted to importing such workers from their own countries. Amaratunga added that, “In addition to the shortfall of human resources in the building sector, there is also a deficiency in the building sector’s backward integration system.” As a result construction companies cannot reap the benefits of low-cost construction materials; specifically cement, concrete blocks, sand, timber and finishing materials – the bulk of which must are imported currently (see analysis). This issue has been compounded by the curtailment of duty-free concessions and the imposition of levies on imported building materials which have steadily increased construction costs.


The government’s key focus for development is the WRMPP. First envisioned by the Western Megapolis Development Plan in 2002, the current master blueprint is based on recommendations originally made in the Sri Lanka 2011-30 National Physical Plan. Designed to transform the Western Region’s urban areas into a high-income economy generator, the project also targets the reduction of urban sprawl, traffic congestion and waste, as well as prioritising the increase of affordable housing and urban services. All of this is slated to take place within an environmentally friendly planning and development framework, according to a report published by the MMWD.

The WRMPP includes 140 developments, most of which are modelled as public-private partnerships (PPPs) for foreign and domestic investors. With a zone-based approach the project aims to see downtown Colombo redeveloped as Asia’s new global city, on the same scale as Singapore and Hong Kong. The project is geared towards positioning Horana and Mirigama as industrial townships; the city of Malabe transformed into a science and technology centre; Avissawella preserved as a green plantation city; Katunayake as an aero city; and Mathugama a forest city.

These zones will be connected through a logistics corridor that is equipped with a rail and expressway network, a dry port facility, updated trans-shipment facilities and facilities for storage, and collection, and local-level distribution of cargo and goods.

Building Homes

Knock-on effects from the project are boosting housing construction as the UDA estimates that about 673,000 new middle-class and luxury housing units will be required in order to meet the demand in the Western Region, caused by a rising population due to rural to urban migration, up to 2030. The Authority has therefore identified three categories of housing required in the Western Region – underserved, middle-class and luxury.

According to the UDA, at present more than 68,800 families are living in nearly 1500 underserved settlements in Colombo that are not suitable for human habitation. A plan to relocate these families to new housing forms part of an ongoing, low-cost housing programme that has seen more than 17,400 low-cost units constructed or nearing completion. The total cost of constructing 68,815 units has been estimated to cost approximately LKR500bn ($3.5bn). If the Megapolis project is to run efficiently, more reliable power supplies will also be vital. The Ministry of Power and Energy issued a tender in November 2016 for the construction of Sri Lanka’s first 300-MW liquefied natural gas (LNG) power plant to help power the WRMPP. The plant will be built on a build, own, operate and transfer basis for a period of 20 years.

Despite the proliferation of detailed plans, the project is still very much in the beginning stages. Draft master plans have been published for the townships, cities and logistics corridor, as well as an environmental asset plan and planning, transport and regulatory plans. Feasibility studies, project procurement documentation and tender action plans are also being performed. Lands for assorted project zones are set to be acquired, and a new Western Region Megapolis Authority Act was tabled in April 2016.

A Global Financial Centre

Already under way is the $1.4bn Colombo Port City development, recently rebranded the Colombo International Financial City (CICF), which aims to build a 2.7-sq-km city and financial centre entirely on reclaimed land on Colombo’s waterfront, adjacent to the main port and the historic Galle Face Green urban park and financial centre. Together, Colombo and the surrounding Gampaha and Kalutara districts are forecast to accommodate 9.1m people by the year 2035. The Sri Lankan government is hoping to make the burgeoning city the main financial district between Singapore and Dubai. “The port city on its own can serve as evidence that Sri Lanka is more than capable of handling large ticket investments like the Megapolis project,” Houliang Jiang, managing director of the CICF China Harbour Engineering Corporation (CHEC) Port City Colombo, told OBG.

The CICF, which is being built by the Chinese firm China Communication Construction Company (CCCC), will be managed by CHEC in Port City, Colombo. It will be granted a special status as a unique financial and business district of Sri Lanka operating under its own financial and legal system in order to ease and encourage international business transactions and investment. The project had a somewhat rocky debut. Initiated and agreed by the Rajapaksa administration in September 2014 in the presence of President Xi Jinping of China the project was suspended by newly elected President Maithripala Sirisena’s government in March 2015. After a review – and to void legal repercussions brought on by the CCCC – the project was restarted under the terms of a revised agreement.

In addition, to ease concerns about environmental degradation, the revised agreement includes increasing the list of environmental conditions. Twenty hectares of reclaimed land for the project will be granted to the CHEC on an extendable 99-year lease basis instead of the previously agreed freehold basis. This was in response to concerns voiced by the Indian government, which accounts for 70% of the trans-shipment going through the Port of Colombo. The revised tripartite agreement was signed in August 2016 by the MMWD, UDA and CHEC, with work permitted to begin again after an 18-month hiatus.

Above Ground

Improvements to the Colombo region’s transport network include the Terminal expansion and runway project at the Bandaranaike International Airport. The Japanese government-funded project will expand the existing airport infrastructure to cater to up to 15m passengers, and is scheduled to open in 2020 for international flights. Timing for a planned second runway to accommodate the Airbus A380 has yet to be announced.

Ajita de Costa, chairman of the WRMPP, announced in July 2016 that Colombo will also be getting a light rail transit (LRT) network, with the initial 25 km of elevated alignment already paid for with a soft loan from the Japan International Cooperation Agency (JICA). Projected to cost $3.5bn, the LRT system will combine a mix of at-grade and elevated sections and will eventually cover a 75-km route, with three routes servicing Colombo’s central business district and an additional four lines extending into the surrounding suburbs. The added transport infrastructure will also support the development of the urban areas centred on Colombo and the districts of Gampaha and Kalutara. In addition to JICA, Japanese construction company Taisei and Tokyo-based international conglomerate Hitachi have also shown interest in participating in subsequent stages of the light rail project.

Road & Rail

The Road Development Authority is planning the construction of the new expressways and major road projects to upgrade the overall road network. The projects aim to increase inland connectivity and expand the existing expressway network. The government also plans to develop 6000 km under a programme to upgrade the country’s rural roads.

In late 2016 the Sri Lankan government disclosed plans for two highway corridor systems connecting major regions in the country. The south-western corridor will link the proposed Kandy-Colombo Expressway and the existing Southern Expressway, and a sub-corridor along the central highlands will link Kandy via Nuwara Eliya to Badulla. Because of its proximity to the Katunayake Airport and Colombo’s harbour, this region is considered to have the strongest potential for connecting global supply chains. The second corridor development will connect the Eastern and North Central Province to Jaffna, also linking the port city of Trincomalee to Rajarata.

The new expressways include the Ruwanpura Expressway, the Central Expressway, an elevated urban expressway from New Kelani Bridge to Battaramulla, a new bridge in Kelaniya and the elevated Colombo-Katunayake Expressway extension. The Central Expressway essentially duplicates the route of the existing A1 highway from Colombo to Kandy Road. The expressway will be built in three phases with overseas funding and is set for completion in 2018 at a cost of approximately LKR200bn ($1.4bn).

In late November 2016 the construction of the third section of the Central Expressway received two bids: one from Fujita for LKR147bn ($1bn) and the other from Taisei at LKR159bn ($1.08bn). Two additional expressways, one connecting Colombo and Rathnapura in Sabaragamuwa Province, and the other connecting Colombo and the city of Anuradhapura in the North Central Province, will begin construction in 2017. A 20-year, $3.1bn railway modernisation programme has also been proposed, which would see the country’s railways completely restructured. The plan includes electrifying a total 196 km of existing railway lines and adding another 52 km to the grid. The existing rail lines – which run from Panadura to Veyangoda, Ragama to Negombo with an airport connection, and the Kelani Valley Line – would be accentuated by a new line running from Kottawa to Horana and a freight line servicing Kelaniya, Dompe and Kosgama. In the pipeline: In addition to transport, the country is investing in clean water systems. The completion of reservoirs at Moragahakanda and Malwathu Oya will provide the region with more arable land for agriculture and clean drinking water. The projects will cost some LKR100bn ($682m) and LKR12bn ($81.8m), respectively, with funding secured from the Export-Import Bank of China. The Monaragala-Buttala Integrated Water Supply project, being constructed by Belgian firm BESIX, will provide potable water to more than 60,000 people. The opening ceremony for the project was held in March 2017. Two water supply projects are also under immediate construction: the Weliwita and Kandaketiya projects. As the first PPP drinking water projects in Sri Lanka, they will meet the water demand of 3000 families living in and around the southern and eastern boundaries of Colombo municipality.

Master Plans

In addition to the plans for the CIFC and Megapolis project, master plans have also been drawn up to open up 50,000 acres of land for economic zones in Hambantota, Trincomalee and Kandy to foreign investment and the private sector. In the eastern region, a Singaporean urban planning firm, Surbana Jurong is in charge of creating a master plan to include the construction of a new refinery, a natural port and an airport. Surbana Jurong’s plan will develop the major port city of Trincomalee into an economic hub and incorporate a concept plan for the Trincomalee metro area that will take in transportation, infrastructure, and environmental and implementation proposals.

Meanwhile, Kandy, the UNESCO World Heritage Site, is to be conserved as a major religious, cultural and historic site. Already among the most visited areas in Sri Lanka, when the Kandy-Colombo Expressway is completed, the region is likely to become an attractive investment destination. Kandy’s master plan is being developed by an undisclosed Japanese company.

In recent years, the capital of the rural southern district of Hambantota has been the location of a number of ambitious development programmes initiated by the Rajapaksa government. The former president’s hometown, Hambantota was picked to become the country’s second city after Colombo. The development plans featured a $1.4bn deep-sea port, the Hambantota Mattala International Airport, a currently unbuilt industrial zone, an LNG plant and a tourism zone, as well as a conference centre and cricket stadium.

In 2010 China financed the projects with $8bn in soft loans with an eye towards weaving Hambantota, Colombo South Port and Colombo Port City, now CICF, into its Maritime Silk Road strategy, which aims to connect Chinese-invested and managed infrastructure and connectivity across Asia, Africa and Europe. In November Prime Minister Ranil Wickremesinghe announced government plans to lease an 80% share of Hambantota Port for $1.2bn to China Merchants Holdings. The government also offered China an equity swap in the investment zone to pay off some of the $8bn debt. The Mattala Rajapaksa International Airport will also be available to investors on a lease basis OUTLOOK: The construction sector is uniquely situated to assist the country in easing some of its debt burden and helping drive growth. Boosted by its improved international rankings, professional and quality-conscious sector management and labour, and the government’s budget proposals to stimulate the sector, stakeholders in the country and abroad can expect brisk growth and a sustained period of expansion for the foreseeable future.

However, the sector must first overcome some significant obstacles lying its way, namely the challenge of producing and retaining sector talent, resolving labour and building materials shortfalls and attracting foreign investment. This holds true for lower-profile projects, such as building low- and middle-income housing, expressways and rural roads, as well as its high-profile projects like the Megapolis project and CIFC – as each will sustain and complement each other as the country builds its way into a more prosperous future.


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The Report: Sri Lanka 2017

Construction & Real Estate chapter from The Report: Sri Lanka 2017