The lure of Chinese loans : Sri Lanka’s experiment with a special framework to finance its infrastructure investments

Abstract

China was the leading provider of external finance to Sri Lanka for infrastructure development during 2010-2016 accounting for 37% of the total. Sri Lanka borrowed USD 5,895 million from China for infrastructure development during this period. More than half of these loans from China (53%) came through a special regulatory framework set up in 2010, enabling the government to entertain unsolicited proposals (USPs) for public funded infrastructure projects circumventing the normal competitive procurement process. This research paper delves into the design and the actual practice of this special regulatory framework. Based on published and unpublished official documents and conversations with the officials, the paper unravels the flaws in the design and the execution of the special framework. In depth investigation of a water supply scheme implemented via the special framework demonstrates how the flaws in the design and the implementation led to outcomes different from the ones expected at the time the framework was established. It reveals the hidden costs the country incurred to secure funds for its infrastructure development and the ineffectiveness of the oversight processes in place to detect and prevent malpractices and irregularities.