At the outset of Japan’s strategic interest in the open Indo-Pacific and its push for Sri Lanka to obtain the International Monetary Fund (IMF) programme, as well as to resume the Light Rail Transit (LRT) project, Japanese Foreign Minister Yoko Kamikawa visited Colombo on 4 May 2024. However, the final decision rests with the Sri Lankan Government.

This crucial visit aimed to address the vacuum created by Sri Lanka, causing unease for the Japanese when two of their mega projects, namely the East Container Terminal and LRT, were scrapped amidst corruption scandals involving top ministers in Sri Lanka. Following this, Japan also abandoned its BIA expansion project due to the financial crisis Sri Lanka has been facing, leaving it unable to repay its international donor debts.

Cabinet approved the proposal in July 2023 to establish a timeframe to sign an agreement with the Japanese Embassy in Colombo to recommence the Light Rail Transit project, which the previous government unilaterally scrapped in 2020. Kamikawa’s visit couldn’t achieve much as the completion of the IMF programme was prioritised as their primary demand. Had the LRT project been implemented by the year 2025 as planned, Sri Lankans would be getting ready to travel on the light rail in the city of Colombo.

Japan has now concluded that unless the IMF restructuring is completed with all donors on a level playing field, they are not open to any resumption of projects such as the LRT and the BIA expansion project, nor will they consider further funding in the future. However, the current government has already begun discussions about resuming talks related to the LRT. The chances of success are slim because Japan expects to restart it fresh, while the loan and the design remain active. 

Foreign Minister Kamikawa, after visiting three African countries and France, came to Sri Lanka and then left for Nepal before concluding her tour. While in Nepal, she addressed the press and responded to questions regarding Sri Lanka. “Regarding the debt issue, I emphasised the importance of debt restructuring transparently and fairly, and explained the prospect of resuming yen loans,” she told President Ranil Wickremesinghe. Japan Foreign Minister Kamikawa highlighted the importance of promptly signing the Memorandum of Understanding on debt restructuring with the Official Creditor Committee and swiftly implementing debt restructuring with all creditors transparently and comparably. She also stressed the need to focus on anti-corruption measures and transparency in the policy-making process in accordance with the agreement with the IMF.

Kamikawa also expressed Japan’s intention to further support Sri Lanka’s development by swiftly resuming yen loans for existing projects once the MoU on debt restructuring is signed and the Sri Lankan Government’s intention to swiftly conclude a bilateral agreement is confirmed. The Sri Lankan side explained the efforts to restructure the economy in the two years following the suspension of debt payments and the latest situation regarding debt restructuring. President Wickremesinghe reiterated his appreciation for Japan’s contribution to the discussions on debt restructuring.

Sri Lanka and a group of creditors, chaired jointly by Japan, India and France, have reached a basic agreement on main debt restructuring conditions, Japan hopes to push for an early final agreement.

Shelved light rail transit project 

During the Sirisena-Ranil Government, they decided to enter into an agreement on the LRT with the Japan International Cooperation Agency (JICA). However, as soon as Gotabaya Rajapaksa assumed office, he opted to scrap all ‘expensive’ projects to ‘save’ money for the country. Unfortunately, he was ill-advised regarding the LRT, which had already undergone a feasibility study and obtained the first tranche of USD 273 million of a USD 1.5 billion loan. The loan has a term of 40 years with a 12-year grace period. However, we are currently consuming the grace period of the first tranche without any construction being done.

It’s important to note that the LRT loan was never cancelled; only the project was cancelled. If we were to cancel the loan, we would have to pay around USD 273 million (first tranche), which we haven’t done yet. Therefore, resuming the project would essentially be initiating a new project altogether, with considerations for dollar conversion and new perspectives coming into play. The officials involved in the project claim to have already spent close to USD 100 million on detailed designs, studies, surveys, etc. According to former officials, if we decide to continue the same project, we won’t have to repay, but given the changed circumstances, the project costs will likely need re-evaluation, although the detailed designs will remain the same. The total estimated consultancy services cost was USD 133 million for the entire period from 2019 to 2025, covering detailed designs, construction supervision and other related services.

The feasibility report on LRT Phase-I completed in 2018, estimated a total cost of USD 2.2 billion,  with cost components such as VAT, price escalations and price contingencies accounting for about USD 800 million, which has been misinterpreted numerous times as the construction cost leading to the per km rate, (mis)presented as USD 140 million per km. 

Dr. de Silva, a consultant to the Project Management Unit stated the per km rate has to be calculated based on construction cost if you are to compare the cost among other similar projects. It was estimated at the feasibility stage as USD 1.3 billion (or at USD 85 million per km). But after detailed engineering studies, it was re-estimated that the cost would be around USD 1 billion, reducing the unit cost to USD 62.5 million per kilometre, which is on par with any other LRT worldwide.

Irresponsible officials 

Those responsible for shelving the project and causing the country to incur losses are free from accountability at present. Listed below are those responsible for the cancellation of the LRT: Gotabaya Rajapaksa for giving instructions as President; P.B. Jayasundera as Secretary to the President sending a letter to the Secretary of Transport instructing the cancellation. The project was commenced after a yearlong feasibility study, approval of EIA, approval of all government agencies including the Finance Ministry and the National Planning Department. The investigation should commence with inquiring how Monti Ranatunga, Secretary of Transport and Gamini Lokuge, Minister of Transport at the time of cancellation submitted a Cabinet Paper, claiming that the project would not have any economic benefit and that it has excessive relocation. Bandu Wickrama and Nalaka Godahewa both have claimed not to have any involvement in the cancellation. Priyath Bandu Wickrama as Secretary to the Ministry of Urban Development which the project was under, made a statement that the project was going to be done as an investment project even before it was cancelled. 

It should be noted that JICA loans were not ‘Lump-Sum’ loans. The amount referred to as ‘Loan Amount’ is a ceiling to set the maximum amount that could be disbursed by JICA for the project. The interest is calculated on the disbursed amount and not on the loan amount. There is no penalty or additional payments in the case of the Borrower using less than the loan amount, and only the amount actually disbursed is to be repaid.

JICA provided a 12-year grace period, and we have utilised the first five years effectively. Consultancy services, such as detailed design, amount to only 0.01 per cent interest on the first tranche of the total loan of USD 273 million. Japan allocated USD 1 to 2 million for the feasibility study conducted by Oriental Consultants from Japan, which was a grant. The project had already commenced after signing the agreement. Detailed feasibility studies were completed, and detailed designs were ready for tender when they were halted in 2020. It was initially planned to be operational by the end of 2024 or early 2025.

The Project’s Steering Committee comprising 33 senior officials of the stakeholder, Government Institutions was established on 18 July 2017. Every major decision of the project was taken through this committee. The project has been presented to many professional institutions in the presence of renowned local experts. Project’s Feasibility Study, EIA and Resettlement Action Plan (RAP) were formulated after public consultations, and final versions were published for further public comments in Sri Lanka. Final EIA and RAP were subsequently published even in Japan for public comments for 120 days as a loan prerequisite.

Loan initiation

Project Director, Eng. Chaminda Ariyadasa, in 2020, wrote to the Secretary Ministry of Urban Development, Water Supply and Housing Facilities on the implementation and the progress of the LRT with all satisfactory information: His letter stated, after a thorough analysis covering, Passenger Demand Forecast, Connectivity, Cost Estimation, Financial Analysis, Economic Analysis, Analysis of Operation and Maintenance, Environmental Impact Assessment (EIA) and Social Impact Assessment (SIA) including Resettlement Action Plan (RAP), the study was completed in February 2018. 

Upon realising the viability of the Project, the Government of Japan (GoJ) expressed willingness to provide a loan amounting to USD 1.85 billion at an interest rate of 0.1 per cent per annum for civil works and equipment and 0.01 per cent interest rate per annum for Consultancy Services with a repayment period of 40 years including a grace period of 12 years, under STEP (Special Terms for Economic Partnership) conditions, for the implementation of the Colombo Light Rail Transit (CLRT) Project. With a series of discussions between the Governments due to the situation of the economy of Sri Lanka, the GoJ agreed to provide the loan in six tranches where the same interest rate, grace period and repayment periods are applicable to each tranche separately. Subsequently, the Cabinet of Ministers of the GoSL granted the approval in January 2019 for the Ministry of Finance to enter into a loan agreement with the GoJ. The Loan Agreement between GoSL and JICA was signed on 11 March 2019 for the implementation of an LRT system from Fort to Malabe.

To carry out the Detailed Design, Tender Assistance, Construction Supervision and Project Management of the Project, a JV of four Japanese Companies and a Sri Lankan Company led by Oriental Consultants Global Co. Ltd. was selected to be awarded with the Contract. The Consultancy contract was awarded on 13 March 2019 and the Consultant mobilised on 1 April 2019.  

The loan has two components: anything related to construction is 0.1 per cent, and anything related to consultancy services, such as detailed design, is 0.01 per cent. Further, the land acquisition for the Project is already in progress. Section 10(1) has been issued for the lands in the depot area and has been sent to the Valuation Department for valuation purposes. The school buildings affected along the trace also have been discussed with the Chief Secretary, Provincial/Zonal Directors and the principals for proper reinstatement.

There is no Act available in Sri Lanka to regulate LRTs. Thus, a Bill is being prepared by the Legal Draftsman’s Department to get it enacted by the Parliament of Sri Lanka with regard to the institutional structure for regulation, operation and maintenance of the LRT system. The initial draft was prepared by a Committee appointed for the Operation and Maintenance of the Project and the Legal Draftsman’s Department has refined the Draft and sent it back for review.

In addition to the above key activities, many other activities related to the project such as awareness programmes, coordinating with utility agencies, station area development concepts, CLR branding, Feeder Bus services, MRV system, gender and disability mainstreaming, green building certification, formation of operation and Maintenance Company, etc. were progressing simultaneously.

Accordingly, the first time, slice loan of JPY 30,040,000,000 has been signed between GoSL and JICA, which is the estimated fund requirement for the first two years. Both parties have the opportunity to decide on both the amount and the timing of the next time slice according to actual contract amounts and actual schedules. This approach gives the full flexibility to the Borrower to borrow only what is needed for the project, without blocking the debt ceiling, and also maximising the grace period.

Officials involved in scrapping LRT unpunished

A more accurate cost estimate could only be prepared during the Detailed Design stage, which is nearing completion and expected completion is April 2020. Even then, it should be noted that the actual cost would be dependent on market factors and bid conditions at the time of procurement. As such, the estimates could be used only as an approximate guide. We understand at the New Kelani Bridge (NKB) project, for one package the contract price was 30 per cent less than the engineer’s estimate due to the participation of a local company as a JV partner, and the other package was at the same range as the estimate.  

When investing in transportation infrastructure, the key consideration is the economic benefit derived from it. This includes factors such as travel time savings, fuel cost savings, reductions in emissions and accidents and whether these benefits outweigh the construction costs. This evaluation is typically done using the Economic Internal Rate of Return (EIRR). An inquiry should be initiated because the project commenced after obtaining all necessary approvals, including feasibility studies, Environmental Impact Assessments (EIA) and Treasury approval. The fact that the Secretary, to appease Gotabaya, wrote a Cabinet Paper disapproving of the project needs to be analysed. Just as former Health Minister Keheliya Rambukwella and the Secretary are in remand for their mistakes, such officials should not be spared either.

Japan’s vision on a Free and Open Indo-Pacific Japan, despite its longstanding bilateral ties with Sri Lanka, which are highly respected, has aimed at fostering a 

win-win situation. However, as Sri Lanka embraced China and its Belt and Road Initiative, the Indo-Pacific region became increasingly vital. China’s military strategy, particularly in the maritime domain, and the growing Sino-Japanese military imbalance prompted Japan to join the Quad, which includes the US, India, France and Australia. This alliance seeks to offset China’s influence and maintain stability in the Indo-Pacific and the Indian Ocean region. Japan proactively advocates for the importance of maritime order in the Indo-Pacific region, recognising it as crucial for regional stability and prosperity.

Concerned about maritime stability and China’s aggressive maritime expansion, Japanese Foreign Minister Kamikawa agreed to provide Sri Lanka with a vessel and sonar system worth about ¥1 billion in total as a grant. Kamikawa stressed Japan’s position on realising a free and open Indo-Pacific and demonstrated support for Sri Lanka, which sits in a strategic position along sea lanes. As China advanced into the Indian Ocean in recent years and Chinese oceanographic research vessels have been actively conducting surveys in the vicinity of Sri Lanka, Colombo was considering banning such vessels altogether.

With this latest grant for a vessel and sonar system, Japan will support Sri Lanka in conducting oceanographic surveys as a countermeasure. The vessel, equipped with sonar, is intended to be used for compiling maritime charts.

Minister Kamikawa stated, “Japan and Sri Lanka are both island nations surrounded by the sea. Amid the severe international situation in recent years, Japan intends to further strengthen cooperation with Sri Lanka in the maritime domain to realise a ‘Free and Open Indo-Pacific.’”

She also visited the Sri Lanka Ports Authority (SLPA), where her delegation held talks on ongoing and future developments in SLPA and the Port of Colombo (POC). The Japanese Minister expressed her readiness to offer any necessary assistance and support for the development of the port sector in Sri Lanka.

Japan, the US and India, as part of the strong Quad team, will continue assisting Sri Lanka as a bilateral partner, while closely monitoring all maritime activities. Sri Lanka’s maritime activities are on the rise, and the frequency of foreign officials and ships visiting the country is expected to increase. This trend is due to Sri Lanka’s growing strategic importance amid Chinese aggression in the region.