Once completed, the project will provide clean drinking water to about 600,000 people in 42 villages.
The project will be spearheaded by the China Machinery Engineering Corporation (CMEC) and will involve laying of over 1,000 km of water pipes.
The Lankan government will also provide an estimated USD 20 million to implement the venture.
The inaugural pipe laying ceremony for the project was done by Lankan Economic Development Minister Basil Rajapaksa yesterday at the town of Mahara, about 19.6 km from Colombo.
In the next three years, CMEC will build a water treatment plant with a supply capacity of 54,000 cubic meters a day and a new water intake volume of 85,000 cubic meters per day, state-run Xinhua news agency reported.
CMEC has been working in Lanka for nearly a decade on a variety of projects. Its largest venture is the Lakvijaya coal power plant that was built with assistance from the Chinese government at a cost of USD 1.2 billion.
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