Countries and Regions

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p. 10 of 20 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Agriculture B. Infrastructure C. Social Infrastructure and Environment D. Governance Dimensions of ADB Operations E. Gender Dimensions of ADB Operations F. Private Sector Operations IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Sri Lanka : III. Sector Strategies

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B. Infrastructure

1. Energy

60. Following the severe economic and social dislocation in the country in 1996, due to a power shortage resulting from the capacity constraints of the hydroelectricity grid at the time of a severe drought, the Government’s Public Investment Program started to reduce the level of dependence on the hydroelectricity part of the power system by expanding investments in thermal energy. However, severe budget constraints have continued to limit the public sector’s ability to expand the power grid. Accordingly, substantial reliance is placed on private and concessional sources of finance to ensure that priority investment projects proceed in a timely manner. Todate, four major private sector thermal power projects have been negotiated and one of the projects is already fully operational.¹⁶

61. The Government has acknowledged the need for and its commitment to sector reforms and, with the ADB’s assistance¹⁷ , has embarked on a program to restructure the sector, to ensure adequate and reliable power supplies at competitive prices through increased private sector participation and improved management and operational efficiencies. Under the new arrangements all future thermal generation power projects are to be developed by the private sector, while major hydroelectric projects will be developed by corporate public companies. The new power sector reform legislation is expected to be in place by mid 2001, to unbundle power generation, transmission and distribution operations of the Government controlled Ceylon Electricity Board (CEB) into separate companies. These companies are likely to include two or more power generating companies (in addition to the private sector power generation plants that are already in operation), a power transmission company, and appropriate number of power distribution companies. The companies would be set up under the Companies Act. The new power sector reforms legislation, which would replace the existing CEB Act and the Electricity Act, would simultaneously institutionalize the establishment of a Power Regulatory Commission. ADB, in close cooperation with the World Bank, is the principal dialogue partner of the Government concerning the reform program. The proposed Power Sector Development Program in 2001 will assist the Government in the restructuring of CEB, while the World Bank would assist to set up the power regulator.

62. Together with this ambitious sector reform program, rural electrification has been accorded high priority by the Government through continued public sector investment to ensure the access of poor to adequate supply of electricity. In line with ADB’s overarching objective of poverty reduction and the Government’s firm commitment to extension of electricity supply to the poverty-stricken rural areas, rural electrification remains an important area of support by ADB in the medium term.

63. Given the above, ADB’s strategic objectives in the energy sector are to: (i) assist in developing a framework for ownership and management which will ensure adequate amounts of electricity at economic and affordable prices; (ii) promote and participate with loans and equity in private power projects, particularly in new power generation projects, in order to increase the total financial resources available for expansion of the sector and to improve efficiency of operations and management; (iii) provide continuing financial support for investments in transmission and distribution projects, particularly if they underpin important reforms in the sector; (iv) assist with financing rural electrification to ensure that the benefits of economic development reach the disadvantaged rural population; (v) improve the financial viability and management of power companies through implementation of an appropriate tariff policy, rate of return on capital and self-financing ratio; (vi) ensure that the tariff structure is reasonably close to the actual cost of service to each major consumer category, with minimum cross subsidies, in order to promote economic efficiency in consumption, and to reduce the heavy burden of paying cross subsidies for industrial and commercial consumers; and (vii) support reforms that will improve the operating efficiency of the sector through the promotion of competition and improved management of the power sector companies. In the petroleum subsector, ADB is, through the provision of an ADTA for Study of Pricing Policy in the Petroleum Subsector, addressing structural distortions in the liquid petroleum side.

2. Transport

64. The Government acknowledges that the lack of high mobility roads and an efficient transport network linking villages, towns and cities has been major constraint facing the poor working predominantly in agriculture and rural non-farm activities. Currently, about 90 percent of people and goods depend on the road network for conveyance, which makes it the dominant transport mode in the country. While private sector investments have been limited to financially viable infrastructure projects, the development of strategic infrastructure such as non-revenue-generating roads and ports through public sector investments and improved sector efficiency are critical to expand economic opportunities and make accessible to the poor employment, education, health care and market facilities. Especially, the Government noted the importance of institutional reforms and restructuring with increasing private sector participation in the provision and/or operations of road and port facilities, to ensure that the facilities are efficiently managed to meet the increasing demands of society.

65. In response to the development needs of the sector, ADB’s approach has over time broadened beyond investment in rehabilitation of key road links and ad hoc policy engagement in the 1980s and early 1990s towards a consistent dialogue that encompasses policy, institutional and investment matters of the entire road network. ADB’s strategy over the medium-term aims to mobilize resources to remove the physical bottlenecks in the road network and also to support efforts to improve the policy and institutional environment and raise subsector efficiency and performance¹⁸. Toll road projects could also be considered for ADB participation through its private sector window. In the pursuit of this objective, key issues to be addressed include: (i) institutional reform and capacity building; (ii) subsector financing - road user charges, operation and maintenance financial allocations and practices, private sector participation; (iii) environmental and social impact of civil works; (iv) the optimum integration of the road network with other modes of transport; and (v) road safety.

66. ADB is the main dialogue partner with the Government on policy and institutional reforms in the road subsector to improve sector efficiency, and continues to have a solid portfolio of projects in the pipeline in the medium term. The ongoing ADB-assisted TA for Re-engineering of Road Sector Institutions is assisting the Government to identify and address the key impediments to the orderly and efficienct management of the road subsector. The TA will provide a basis for the review of subsector policies and operating procedures and assist the Government to formulate an action plan for implementation under future ADB-assisted road projects. The processing of the planned Road Sector Development Program in the medium term will depend on the effective implementation of the ongoing projects, and especially, on the creation of a satisfactory policy and institutional environment. Furthermore, scope for future road projects will mainly target poorer provinces of the country and areas that connect poor or isolated areas to the economic mainstream, in line with ADB’s overarching objective of poverty reduction. The results of project social and environmental impact assessments will also be important in determining ADB's support in the infrastructure sector.

67. In the port subsector, following approval of an equity and loan participation in private sector development of the Queen Elizabeth Quay at Colombo Port¹⁹, ADB also approved in 1999 a PPTA for Colombo Port South Harbor Development²⁰, to examine the technical and institutional feasibility of developing Colombo port’s south harbor. The south harbor project will initially involve the construction of a breakwater by the public sector, which will then enable private port operators to build and operate new container terminals in the south harbor. The proposed loan for Colombo Port South Harbor Development with substantial co-financing requirement is provisionally included in 2003, which will systematically address the issue of port sector efficiency through sector reform and restructuring. In the rail subsector, ADB has approved a small-scale TA²¹to assist the Government in finalizing a strategy and action plan for establishing public-private partnership for railways, involving consultations with stakeholders and deliberations at a high-level workshop, in line with its overall policy to promote public-private partnership in infrastructure development.

3. Industry and Finance

68. Policy reform and creation of a favorable environment for private sector development is the focus of ADB operations in industry and finance. The Government has been active in promoting private participation in the economy. Since 1995 when the Public Enterprise Reform Commission commenced work, the Government has made considerable progress in its privatization programs particularly in the plantation, telecommunication, port, power, and aviation subsectors. Despite these achievements, there has been less progress in other state-controlled sector including roads, railways, urban transport, water supply and sanitation, which are characterized by less efficient management and service provision.

69. There are two major impediments to increased private sector participation in the economy. These are: (i) continued public sector engagement in economic activities which are commercial in nature; and (ii) weak enabling environment for private sector participation largely due to the lack of a level-playing field, labor market rigidities, difficult access to financing, particularly long-term debt, and poor governance practices. Accordingly, ADB through a proposed Private Sector Development Program in 2000, to be implemented over 2000-2003, is supporting (i) further privatization and restructuring of state-owned enterprises; (ii) adoption of legislation which would define a competition policy and safeguards the right of consumers; (iii) address labor market rigidities to accelerate private sector investments and raise industrial productivity and cost efficiency, and at the same time, to promote social safety net for labor; and (iv) elimination of distortions in the market arising from regulatory barriers and special privileges accorded to state-owned financial institutions. More specifically, the proposed Program would support for capacity building for the Securities and Exchange Commission, consumer protection as well as insurance and pension regulatory authorities, and the Skills Development Fund.

70. The domestic capital market has made sound progress since liberalization measures were first instituted in the early 1990s. The market infrastructure compares favorably with those found elsewhere in the South Asian subregion, but the equities and private debt securities markets remain thin and underdeveloped. There is good potential for capital market development - with a large number of unlisted companies; considerable long-term financing needs; and a sizable pool of savings mobilized by contractual savings institutions, such as the Employees Provident and Trust Funds and insurance companies. These sources should be channeled to meet the long-term financing needs of the private sector and shift gradually away from funding public sector deficits. Appropriately regulated development of new financial instruments and mechanisms would also contribute to broadening and deepening the market, while an effective competition policy must be in place to facilitate a reduction in intermediation costs. ADB’s approach to facilitating financial sector development in the short to medium term is to: (i) promote good governance over the financial markets by improving the understanding of key governance principles and best practices, building capacity for good governance, and institutionalization of good governance principles through organizational restructuring; (ii) mobilize financial resources from commercial sources, and when necessary, with support of ADB’s guarantee facility, for re-lending to the private sector through domestic financial institutions; and (iii) develop a network of specialized financial institutions (e.g. cooperatives, NGOs, and credit funds) and mainstream suitable credit facilities among the existing financial intermediaries to target the weaker economic sectors including micro-enterprises, small and medium scale industries, retail low cost housing, and the rural areas.

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