It is the stated desire of the Government of Sri Lanka (GOSL) to finance new infrastructure projects through private sector participation. This study outlines a methodology based on financial and risk analyses that can be used by the GOSL or a government utility to analyze the viability of private sector participation in new infrastructure projects. The method is complementary to the price, tariff or toll measure of viability that is adopted at present and it force utilities to compare the benefits of projected consumption growth with cost of incremental supply before rejecting private sector participation in new infrastructure projects. The water supply projects in Sri Lanka are used as the case study.

Financial analyses of a bulk water supply project and a water distribution project are carried out to estimate subsidy percentages that are required to make the projects viable using a model that is developed for investment analysis of all types of new infrastructure projects. This analysis looks at four pricing options for the bulk supply project and sixteen procurement options for the distribution project from the view point of the utility, for three cases of non revenue water (35% as base case, 50% and 25% as extreme cases). The risk analysis takes into account the risk and uncertainty in non revenue water, cost and demand estimates, rate of debt and forecasts of escalation. These analyses show that the best option for the utility for water supply in Sri Lanka is to obtain both bulk supply and distribution projects through private sector participation using BOT arrangements.

The suggested method addresses some of the key issues that arise in Sri Lanka regarding private sector participation in new infrastructure projects. To reap benefits from private sector participation in new infrastructure projects in the water supply sector, the GOSL should review its policy on water pricing with reasonable increases in tariffs.

by Malik Ranasinghe