Tea, Turbines, and Trade-Offs: How Sri Lanka Is Rethinking Watershed Investment
In 2025, the Natural Capital Alliance (then the Natural Capital Project) collaborated with three multi-lateral development banks, 16 countries, and many partners across the globe, each operating within distinct governance systems, institutional entry points, and ecosystem service priorities.
In the months ahead, we’ll spotlight many of these cases - along with other applications of natural capital information, from urban heat planning to guiding loan design. Across each example, we’ll explore the different ways natural capital information is shaping real-world policy, planning, and investment decisions.
Today, we turn to the tea farms, forests, and rivers of Sri Lanka.
Ceylon tea is bright and golden, with a brisk, bold flavor. Sitting down to drink a cup in the morning, it is unlikely that one’s mind jumps to hydropower. Yet in the central highlands of Sri Lanka, these sectors are tightly connected, their value chains intertwined, like tea steeping in water.
In 2025, Sri Lanka exported over 257.44 million kilograms of tea to more than 100 countries (that is about the same as 2.5 million average-sized cars, 51,500 adult African elephants, or three of the world’s largest crew ships) with the tea industry contributing a total revenue of just over 1.46 billion to the economy.1 At the same time, hydropower is central to the country’s energy and water security goals, and as climate change and increasing pressure on water supplies mount, the government plans significant investments to expand hydro and other water infrastructure. Critically, these two priorities are interrelated.
The way tea is often grown makes it a significant source of sediment runoff – and this matters… why?
When sediment is carried downstream and accumulates in reservoirs, it reduces storage capacity and undermines hydropower performance, increasing costs for maintenance, infrastructure longevity, and water management. This creates a complicated cost–benefit dilemma for land management and strategic investment.
Think of it as a series of tricky “if/then” statements:
IF Sri Lanka invests heavily in new water and energy infrastructure, THEN it must protect reservoir capacity and hydropower performance by reducing sedimentation.
IF erosion is minimized by transitioning tea farming toward less erosion-intensive land practices, THEN revenue from tea production may decline.
IF those opportunity costs are not recognized or compensated, THEN incentives to protect upstream landscapes remain weak, even as downstream infrastructure is placed at risk.
Without a way to quantify and compare these competing costs and benefits across sectors and landscapes, any policy or investment decision risks optimizing one outcome while undermining another.
Natural capital information is one way to weigh these trade-offs. In this case, an integrated team of scientists and collaborators applied natural capital models, specifically the InVEST Sediment Delivery Ratio (SDR) model and the ROOT optimization model, to identify landscape configurations that could optimize the balance between reducing sediment runoff and supporting economic activity.
The analysis focused on the Mahaweli watershed, pinpointing key areas where interventions could most effectively reduce erosion and sediment export while minimizing losses from tea production. Three scenarios were considered: maintaining existing tea plantations, converting all plantations to native forests, and a mixed “optimal” approach that balanced ecological and economic outcomes.
Results showed that full-scale restoration would incur substantial costs, both from direct restoration expenses and forgone tea revenue, while selective restoration could reduce sediment export by up to 700,000 tons per year (a 50% reduction) with economic losses of tea production limited to 150 million rupees.
Based on these inputs, the ROOT model found different landscape configurations, each resulting in a different level of restoration costs and ecosystem services. The results were configured Pareto optimal, i.e., presenting the best possible trade-off for a given level of each objective. The resulting Pareto frontier was constrained by two points. First, no restoration will result in no costs, but also no increase in ecosystem services. Second, restoring all tea plantations back to native forest would lead to the greatest reduction in sediment but also the greatest restoration costs. The scenarios of greatest interest are located between those two extremes.
The findings demonstrated that while restoring certain areas could enhance ecosystem services like sediment retention, large-scale conversion of tea plantations (which are both socially and economically important) may, realistically not be the most viable or desirable policy option.
Not only would it be expensive to restore large-scale hectares of tea to native forest, but they would also lose significant revenue from tea-farming (not to mention socio-cultural costs). Yet the analysis helps visualize exactly where on the map a more nuanced approach (such as improved plantation management or targeted restoration) would most effectively achieve meaningful sediment reductions at lower cost.
Additionally, analyses such as the one piloted in this project could be instrumental in supporting the design of other finance mechanisms currently being explored in Sri Lanka, including blue and green bonds, debt-for-nature swaps, carbon credits, and payment for ecosystem service schemes. Some additional promising options for the future could include pairing this type of analysis with an engineering study, for example, that specifies how much sediment load would need to be reduced to ensure the long-term functioning of the reservoir. A ROOT analysis like the one in this study could then identify which restoration activities would achieve that reduction at the lowest cost.
Alternatively, IF Sri Lanka committed to increasing forest cover or protecting a defined area of landscape - whether to meet the requirements of a green bond, a global climate agreement, or other policy commitments - THEN a ROOT analysis could highlight where those actions would deliver the greatest gains in ecosystem services such as sediment retention.
So far, this landscape optimization approach contributed to an agreement between the Sri Lankan government and the Asian Development Bank supporting a $200 million investment in the Upper Mahaweli Watershed. The government is also planning to incorporate natural capital accounting into a new climate-smart green growth strategy. Read More about the 3Ps Sri Lanka Pilot Project: Watershed Investment Planning | Natural Capital Alliance.
The Natural Capital Alliance at Stanford University, the Asian Development Bank (ADB), and the University of Peradeniya collaborated on this initiative to explore science-based, strategic watershed investments as well as a training program for conducting these approaches. Other institutions contributing to the analysis and capacity development efforts include the International Water Management Institute (IWMI) and the Centre for Poverty Analysis (CEPA).
https://wits.worldbank.org/trade/comtrade/en/country/ALL/year/2023/tradeflow/Exports/partner/WLD/product/090240#:~:text=In%202023%2C%20Top%20exporters%20of,113%2C716.59K%20%2C%2023%2C772%2C000%20Kg
Xinhua. (2026, January 22). Sri Lanka tea exports rise in 2025 on higher volumes, earnings. Xinhua News. https://english.news.cn/asiapacific/20260122/781c40999711445e95ca7f71d49ff9eb/c.html