Sri Lanka counts the cost of lost development opportunities

Investments exit in Sri Lanka causes development dilemmas

By Kishore Reddy

Sri Lanka's economic development over the years have faced significant setbacks the withdrawal of several major infrastructure and investment projects. The recent pullout of Adani Green's USD 1 billion renewable energy project being the latest in a concerning pattern.

The cancellation of the Japan International Cooperation Agency (JICA)-funded Colombo Light Rail Transit Project was particularly impactful. The project would have revolutionized urban transportation, reducing the commute time between Malabe, a rapidly developing suburb, and Colombo Fort, located in the heart of the capital city to 30 minutes from the current 45-90 minutes. The fully electrified network would have provided an emission-free travel experience while significantly reducing traffic congestion in Colombo.

Similarly, the loss of the USD 480 million Millennium Challenge Corporation (MCC) grant in 2020 ‘due to lack of partner engagement’ meant missing out on crucial urban transport upgrades and rural road development. The grant would have improved public transportation for millions while helping farmers get their goods to market more efficiently through upgraded provincial roads.

The retreat of James Packer's Crown casino project, valued at USD 400 million, represented another missed opportunity for tourism and entertainment sector development. These projects collectively would have generated thousands of jobs and contributed significantly to foreign direct investment (FDI) inflows.

Most recently, United Petroleum Australia's exit from Sri Lanka in early 2025 marks another setback in the country's efforts to attract and retain foreign investment. After entering the market with plans for 150 fuel stations but achieving only 64 dealer agreements, United Petroleum Australia halted operations in December 2024. Their departure, driven by pricing formula issues and operational constraints, signals broader challenges in Sri Lanka's business environment and raises questions about the country's ability to retain foreign investment during economic recovery.

The failure to implement Adani’s renewable energy projects in Mannar and Pooneryn means Sri Lanka will miss out on substantial economic benefits, including annual savings of LKR 30 billion in energy costs and potential reduction in consumer tariffs by 17 LKR per unit. The project would have also helped achieve the country's renewable energy goals while saving valuable foreign exchange through reduced fuel imports.

Adani Green's decision presents a critical setback for Sri Lanka that extends far beyond immediate energy infrastructure challenges. The project's cancellation strikes at the heart of Sri Lanka's delicate economic recovery efforts, potentially triggering a significant erosion of investor confidence, particularly among Indian investors who have been increasingly viewing Sri Lanka as a strategic investment destination.

It is believed that Indian investors will likely interpret the Adani project's exit as a warning signal about Sri Lanka's investment climate, potentially reassessing the country's attractiveness for future investments. Such a perception could create a cascading effect, where initial hesitation transforms into a broader reluctance to commit capital to Sri Lankan ventures across various sectors.

Historically, India has been a crucial economic partner for Sri Lanka, with investments in infrastructure, energy, technology, and manufacturing. The Adani Green project's cancellation threatens to undermine the strong critical bilateral economic relationship. The project would have provided a cost-effective renewable energy solution - offering a fixed tariff of USC 8.26 per unit for 20 years - and also symbolized the potential for collaborative economic development between the two nations. Moreover, provided remarkable economic relief and price stability to Sri Lanka

The financial opportunity cost is stark. Without the project, Sri Lanka is expected to spend approximately $5.5 billion on fossil fuel imports for power generation, based on current prices. This expenditure represents a significant drain on the country's limited foreign exchange reserves and contradicts efforts to develop a more sustainable and economically efficient energy infrastructure.

Current power generation costs range dramatically, with coal-based generation at USC 12.52 per unit, oil-based generation at USC 26.99 per unit, and thermal Independent Power Plants fluctuating between USC 14 to 30 per unit. The Adani project's proposed rate of USC 8.26 per unit would have provided remarkable economic relief and price stability.

The long-term consequences extend beyond immediate financial losses. Each canceled project represents a missed opportunity for technology transfer, job creation, and strategic economic development. For a nation struggling to recover from deep-seated economic challenges, maintaining a reputation as a reliable and attractive investment destination is crucial.

Sri Lanka now faces the urgent challenge of demonstrating policy consistency, regulatory predictability, and a genuine commitment to creating a stable investment environment. Rebuilding investor confidence, particularly with Indian partners, will require transparent communication, strategic policy reforms, and concrete actions that signal the country's dedication to economic collaboration and sustainable development.

Sri Lankans have placed significant hope in the newly elected government, whose stated intentions align with prioritizing national development. There's widespread optimism that the administration will carefully review these missed investment opportunities and implement necessary policy reforms. In addressing the underlying issues that led to these project withdrawals, the government has a chance to send a positive signal to the global investment community that Sri Lanka has learned from past challenges and is now committed to creating a stable, predictable, and attractive environment for foreign investment.

Kishore Duvvuru Reddy is a highly experienced Indian professional with almost three decades of business experience in Sri Lanka and enhancing relations through business, culture, and community engagement. As a Managing Director of multiple companies and President of the Indian CEO Forum Sri Lanka, he has been instrumental in promoting investment development in the country.