Economics of Public Capital Expenditure in the Sri Lankan Road Infrastructure Sector

Abstract

The Sri Lankan Government spends a significant share of its capital budget on road infrastructure. Therefore, it is important to ensure the efficiency of capital deployment in road sector projects. This research was undertaken with the objective of assessing capital efficacy in road development. In addition, the research sought to appraise strategies adopted in the institutionalisation of an appropriate public investment management mechanism, such that the maximum possible economic gain could be obtained. Road projects undertaken by the Road Development Authority of Sri Lanka over the period 2005-2012, covering an overwhelmingly large share of public spending on road sector, were examined. The indicator used as the inverse of capital efficacy was the real capital expenditure intensity per unit of surface area, which was regressed against a selected set of cost-influencing factors, whereby significant determinants of capital intensity were identified. Project size, class of road, nature of terrain, funding mechanism and contract procurement process emerged as significant determinants with their influence being exerted in the expected direction, while the surface technology and the type of contractor were not significant. It was found that to fund projects through bilateral credit tied to contractors domiciled in lender countries without competitive bidding was highly capital intensive, and therefore inefficient, in terms of capital deployment. The outcomes of the study recommend that public investments should be executed through local contractors to the maximum possible extent, and that, whenever foreign funding becomes necessary, contract negotiation with a pre-designated company without competitive bidding should be avoided, given that such a modality would be prone to wastage, leakages, mismanagement, and corruption. It is strongly recommended to institutionalise a competitive procurement process through an effective mechanism for public investment planning, appraisal, and implementation management, to ensure the efficiency of public sector capital expenditure.