Sri Lanka’s Securities and Exchange Commission is considering the introduction of infrastructure and municipal bonds as alternative funding mechanisms for key projects traditionally financed by the government, according to its Chairman, D.B.P.H. Hareendra Dissabandara. This initiative aims to support projects such as roads, railway networks, and other critical infrastructure.
The central government of Sri Lanka continues to allocate a substantial portion of its budget toward public investments nationwide. However, following the devastation caused by Cyclone Ditwah last month, the country is compelled to seek alternative funding sources to rebuild its damaged infrastructure.
“I have already proposed the introduction of infrastructure bonds, and I am also working towards introducing municipal bonds,” Dissabandara stated on Monday, December 29, during a SEC event. He explained that the plan involves selecting municipal councils with strong financial discipline and initiating discussions with a few selected councils to roll out these bonds.
The funds raised through these bonds will be allocated on a project-by-project basis, providing opportunities for small investors to participate in this new financial instrument, Dissabandara noted. Infrastructure and municipal bonds are designed to raise capital for large-scale public projects by attracting investments.
Infrastructure bonds are typically issued by governments or development banks for national projects like roads, railways, airports, and energy infrastructure. In contrast, municipal bonds are issued by local authorities for urban developments such as water systems, waste management, and public transport. These bonds offer fixed or variable interest rates over long tenors, often backed by government guarantees or project revenues, and attract institutional investors through tax incentives or concessional terms.
Municipal bonds operate similarly, relying on local tax revenues or user fees for repayment. This approach promotes decentralized financing and reduces the central government’s burden. However, the introduction of these bonds in Sri Lanka faces significant challenges. The country is grappling with a fragile post-2022 economic crisis environment characterized by high sovereign debt, low investor confidence, macroeconomic uncertainties, and inflation risks.
The regulatory framework remains underdeveloped. The World Bank’s 2019 Infrastructure Financing report highlights weak public-private partnership structures and limited market depth for bond issuance. Despite the SEC’s proposal to issue infrastructure bonds to accelerate recovery post-Cyclone Ditwah in 2025, challenges persist. These include the potential for misuse in opaque governance-linked instruments, fears of cronyism in project allocation, and inadequate credit ratings for municipalities, deterring international buyers.
Without robust safeguards, there are concerns that these mechanisms could exacerbate debt traps or enable political favoritism, as observed in some past projects. Additionally, broad definitions in related laws may risk stifling dissent under anti-terror pretexts.
(Colombo/December 30/2025)
