# 1. Introduction

Governments face the dilemma of allocating limited resources to infrastructure projects while maximizing socioeconomic results and achieving development goals. The Government of Sri Lanka (GoSL) faces a similar challenge, including a reduction in government spending coupled with a widening gap in infrastructure service demand and provision. In this context, it becomes critical for the GoSL to have a system to prioritize investments that can incorporate national goals while optimizing the allocation of public funds.

In Sri Lanka, government investment on infrastructure as a percentage of GDP was 4.9% in 2015 (USD 3.98 billion against GDP of USD 80.6 billion).<sup>1</sup> An estimated USD 823 million of these investments were dedicated to the water sector.<sup>2</sup> As a point of comparison, Thailand spent 8% of its GDP on infrastructure in the same year, while Indonesia and Vietnam spent 9% and 13%, respectively. Estimations suggest that Sri Lanka will need to increase infrastructure investment to around 7% of GDP annually to achieve a level of basic services similar to that of more developed economies or spend around 4% of GDP annually to achieve more modest standards in terms of access and quality of services.<sup>3</sup> Given the current fiscal deficit in Sri Lanka, however, it is unlikely that the government will be able to increase investments to these levels. In 2015, the fiscal deficit reduced to 7.6% of Sri Lanka's GDP, which is still significantly higher than the target of 4.4% of GDP. In the same year, the external current account balance was at a deficit of 2.3%, and public debt rose to over 70% of GDP.<sup>4</sup> As the GoSL committed to reduce the fiscal deficit to 3.5% of GDP by 2020, public budgets will most likely continue to be insufficient to meet all of Sri Lanka's infrastructure needs, further reinforcing the need for a methodical approach to prioritizing the allocation of scarce public resources to infrastructure development.

The World Bank's Infrastructure Prioritization Framework (IPF) offers a systematic approach to infrastructure prioritization that places social‐environmental and financial‐economic factors at the forefront of decision‐making. The IPF is transparent and objective, following a clear step‐wise approach, while leaving space for deliberation to remain responsive to policy priorities. The IPF was piloted in Vietnam, Panama, and Argentina and is currently being applied in Argentina and Chile.

This paper presents the application of the IPF to water supply infrastructure investments in Sri Lanka. To this end, a set of new water supply projects was prioritized at the request of The National Planning Department of Sri Lanka (NPD). The paper first introduces the IPF

> 1 Source: Central Bank of Sri Lanka, Annual Report 2016 – Chapter 3 Economic and Social Infrastructure.

> 2 Source: Ministry of Finance, Annual Report – 2016.

> 3 Source: Nabi, I., & Biller, D. (2013). Investing in Infrastructure: Harnessing its Potential for Growth in Sri Lanka (No. 78300) (pp. 1–125). The World Bank.

> 4 Source: Central Bank of Sri Lanka, Annual Report 2016 – Chapter 10 Fiscal Policy and Government Finance.

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