Financing Sustainable Urbanization in Sri Lanka

Urbanization and cities are expected to play an important role in Sri Lanka’s ongoing transition to become an upper middle-income country. Theory and international experience have long recognized urban areas as important engines of economic growth—providing the benefits of urban agglomeration efficiencies; stimulating gains in productivity and competitiveness; providing markets for goods and services; and generating opportunities for knowledge creation, innovation, and specialization of production and services. The authors argue that mobilizing financial resources is critical to ensuring sustainable urbanization. Financing instruments are needed to raise the upfront costs to build urban infrastructure, and the underlying funding instruments are critical to provide (1) the stream of revenues needed to deliver current urban services, and (2) the funding leverage needed to mobilize the upfront infrastructure financing while protecting environmental amenities. Mobilizing these funding and financing resources requires a coordinated approach involving central and local-level governments, development partners, and the private sector. Specifically, the Sri Lankan government has an ambitious urbanization plan. Major challenges are to be expected in planning, financing, and governance of economic agglomerations and creating city–region linkages that will be socially and environmentally sustainable. The Western Region Megapolis Project alone, for example, is estimated to cost over $40 billion, roughly 50% of Sri Lanka’s GDP in 2015. To date, Sri Lanka has relied on central government investment, often with the assistance of international financial institutions, to finance large-scale urban infrastructure. As these traditional approaches may not generate sufficient funds, the authors argue that the government will need to build long-term partnerships with the private sector, while recognizing the need to enhance the capacities of provincial and local level authorities to play a stronger partnership role in urban development planning and service delivery. Such changes call for (1) resetting the intergovernmental fiscal framework to enable the plans, (2) operationalizing a spatial planning and coordination framework, and (3) institutionalizing a governance framework for urbanization. The authors then provide a detailed set of specific policy recommendations under each broad grouping, with particular focus on the enhancing policy capacity.