19 July, 2024

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Unbundling The CEB II: Ranil & The Politics Of Reforming SOEs

By Rajan Philips

Rajan Philips

It is an old truism in policy analysis that there is nothing purely ‘technical’ in policy decisions. Every policy decision has a political aspect to it. Technical analysis is necessary and useful to identify and evaluate feasible options, including the costs and benefits of each option. In the end, what is selected or rejected is a political matter based on political preferences. There is nothing wrong with that. What gets to be objectionable is when decisions are made to reach outcomes to benefit some or disbenefit someone else based on inappropriate considerations.

I say all this because the Minister of Power and Energy Kanchana Wijesekera alluded to forces within the CEB and “a political group that supported this section from outside” and accused them of having “obstructed reforms at the CEB” that he has been trying to get underway since becoming the subject Minister. While the Minister did not identify the ‘political group’ opposing reforms, he could not have been unaware of the criticisms that the Electricity (Reform) Act that he has got now passed also has the backing of political groups both within and outside the CEB, and for reasons that may not be entirely technical or altruistic.

It is a common suspicion that the electricity reform measures are intended to benefit vested interests not only within but also outside the country. There are suspicions that the Adani Group could be a singular beneficiary of the objectives of the new Electricity Act to promote competition in renewable energy generation and transmission “in accordance with Sri Lanka’s national policies and its international obligations.” There is already a public interest litigation in the Supreme Court filed by the Catholic Bishop of Mannar challenging the 250 MW Mannar Wind Power Project seemingly sequestered by India’s Adani Group.

These fears were reflected in the petitions challenging the Electricity Bill before the Supreme Court and in the Amendments suggested by the Court for constitutional compliance. The government accepted the Court’s Amendment, but in his intervention in the debate the Minister did not bother to explain why the government drafted Bill the way it did and to be chided by the Supreme Court.

The Minister has had a previous run in with the Court over the Petroleum Products Bill in 2022. The Court’s strictures were similar then to what they have been now. The only lesson the Minister and the government may seem to have learnt is that after being pulled up by the Court for trying to keep the Petroleum Products law outside the purview of the Bribery Act, they did not try to insulate the Electricity Act from the applications of the Bribery Act. For what it is worth, the Bribery Act would apply to the implementation of both laws.

Reform Antecedents

The restructuring of the supply and distribution of petroleum products that the Petroleum Products Act was created to provide for is a more straightforward and far less complex business than reforming the electricity sector. As I have written earlier, the lining up of firms from India, China, Australia and the US to import and distribute petroleum products at their allocated outlets is a stroke of Ranil Wickremesinghe’s genius. That is Sri Lanka’s ‘Quad’ version of blending foreign trade and relationships. The young Minister is entitled to whatever credit that is due on the petroleum front, but matters are not going to be that simple in the electricity sector.   

The Minister also tried to answer criticisms that the new legislation was being rushed through by the government. He reminded parliament that the first Cabinet Paper on the new law had been presented in July 2022. But no one reminded him that the roots of the current initiative go back all the way back to 2002, when Minister Wijesekara would have been still a student somewhere, and that they were revived again in 2015 when the Minister first entered parliament.

There is an ADB Report from 2015 that provides a summary assessment of power sector reforms in Sri Lanka. The Report acknowledges inputs received from Sri Lankan professionals and government agencies including the CEB. Historically, the provision of electricity was the responsibility of a government department until the establishment of the Ceylon Electricity Board in 1969. The ADB Report notes that “The CEB carried out all the functions of electricity generation, transmission, distribution and retail supply, with no competition at any level.” So, introducing competition is taken to be the essence of reform. And two phases of reform are identified, starting from 1983.

The first phase of reform included the creation of state-owned distribution company, Lanka Electricity Company (LECO), that took over electricity distribution from local government agencies in designated areas. Beginning in 1996, the private sector was allowed in power generation as independent power producers (IPPs) and small power producers (SPPs). And  in 2000, the CEB unbundled itself internally into six divisions, responsible for generation, transmission, and four of them for distribution. This was primarily an administrative restructuring without legal or financial separation of the unbundled divisions.

Significant legislative changes came two years later, in 2002, with the enactments of the Electricity Reform Act and the Public Utilities Commission Act. The latter enabled the setting up of the Public Utilities Commission of Sri Lanka (PUCSL) as the national power sector regulator, but the implementation of the Electricity Reform Act was stymied for want of a Ministerial order that in turn was prevented by political opposition including opposition by CEB staffers. A change in government in 2004, a new President in 2005, and a new Electricity Act in 2009 were all needed for the second reform phase.

The ADB Report notes that the Electricity Act No. 20 of 2009, finally enabled the regulatory functioning of the PUCSL, but it reduced the scope of CEB restructuring that had been envisaged by its predecessor, the Electricity Reform Act No. 28 of 2002. The upshot was a partial unbundling of the CEB, virtually continuing the internal unbundling of 2000, with the addition of a license requirement for each of the unbundled division.

In place of financially and legally independent entities in the power sector, the CEB continues its unreformed existence by holding six separate licenses – one for generation, one for transmission, and four for distribution. The PUCSL itself though created for the grand purpose of regulating all or most public utilities, would seem to have been reduced to a license issuer in the power sector. In addition to the six CEB licenses, the PUCSL would seem to have issued 311 other licenses, the vast majority of them for mini hydro power plants and others for solar and wind power generators. This is according to the spreadsheet listing the license holders that is available on the Commission’s website. A good illustration of licensed private sector competition.

The purpose of the current (2024) legislation would seem to be to restore the objectives of the 2002 legislation that were slashed by the 2009 legislation. That is to break up the CEB not only administratively, but also legally and financially. The ADB Report acknowledges that for all the financial woes of the CEB, there have been remarkable achievements in the technical assets of the electricity sector – especially in hydropower generation and the transmission grid that spans the whole country, in improving national energy supply efficiency, as well as in fulfilling the social purpose of enabling accessibility to virtually every household. It would be a challenge to ensure that these gains are not lost or made unaffordable as a result of wholesale unbundling.

The main shortcomings of the CEB system are two-fold: absence of cost-based pricing for electricity; and the lack of capital for future investment. The CEB’s financial stress is rightly blamed on the approach of successive governments to dictate pricing for electricity that will not cover the cost of producing and supplying it. The irony is that this government or any government will not stop dictating insufficient pricing, but would rather hand over the whole sector to the market. What connects the two horns of this apparent dilemma is of course corruption. And no amount of institutional unbundling would provide the magical cure unless government corruption itself is bundled out.

Ranil and Reform

If there is one political name that consistently appears in all the efforts to reform the energy sector, it is the name of Ranil Wickremesinghe. It was his co-habitation government in 2002 that started the legislative process for reforming and regulating the electricity sector. Those efforts came to a sudden halt when President Chandrika Kumaratunga dismissed the government ‘headed’ by Ranil Wickremesinghe as Prime Minister. The second set of attempts came in 2015 as part of Mr. Wickremesinghe’s second co-habilitation government, this time with Maithripala Sirisena as President. Nothing much came out of that government that was all talk and no result.

The ten year period (2005-2015) in between was the first Rajapaksa decade, and as I wrote in my commentary on the 2022 Petroleum law, Mahinda Rajapaksa as President continued from where Ranil Wickremesinghe had left as Prime Minister. Mutatis mutandis, you might say. Here we are again, more than twenty years later, having Ranil Wickremesinghe rescuing the Rajapaksas from the disaster that their second decade was turning into, and spearheading reforms not only in the electricity and the overall energy sectors, but also in all the so called State Owned Enterprises.

As with the electricity sector and the CEB in particular, the SOEs are universally blamed for being a big part of the current economic crisis, and their reform has become a fundamental condition for getting IMF help to overcome the crisis. There are reportedly 400 SOEs, a majority of them likely created after the great liberalization of the economy that was introduced in 1977. The state of affairs is such that full information is not readily available for the vast majority of them. Even an officially accurate list of all the SOEs is apparently not available.

The government, rather the President true to form, has initiated a virtual Shah process to reform the SOEs based on a shortlist that includes a rather long list of 80 or 130 (depending on who is reporting) of SOEs. That too in this election year with hardly four months to go before the presidential election. If these actions of Ranil Wickremesinghe were to be presented to a company shareholders meeting, he would be declared Chairman of the Board for life. But political elections are a different world and Mr. Wickremesinghe seems determined to fight one last time for his political life.

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Latest comments

  • 0
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    Some of the policy decisions on SOEs are as instructed by the IMF.

  • 0
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    1)”The CEB’s financial stress is rightly blamed on the approach of successive governments to dictate pricing for electricity that will not cover the cost of producing and supplying it. “
    2)”And no amount of institutional unbundling would provide the magical cure unless government corruption itself is bundled out.”
    Politicians by very nature want to win elections. Raising the prices of anything is not popular. I think it unlikely that RW will win the election, because most people are simple-minded and blame him instead of Gota for the current high prices.
    When utilities are government-controlled, people expect cheap or free services. And politicians who want to stay in power oblige……until the whole country goes bankrupt.
    Even with unbundling, politicians like to hang onto control levers. Currently, there are complaints that the competition among fuel suppliers has not reduced prices, and the Minister is threatening action. But the fuel suppliers are simply following the CPC’s lead. The CPC has to keep its prices high to survive, and the others follow. Which company doesn’t want to make as much profit as it can? Still, it is no secret that the government itself makes a lot of money on fuel taxes, just like alcohol and tobacco.

  • 0
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    Feasible options, costs and benefits will be the discussions according to the author. But the reality is that we citizens have been disconnected because the robbers including the 225 don’t pay their bills for their luxury lifestyles in their use of ACs and all gadgets and paraphernalia. If the robbers are disconnected, the whole country can have electricity without this pretended struggle. Namal’s wedding bill was paid by an MP.

    • 0
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      DTG,
      “robbers including the 225 don’t pay their bills for their luxury lifestyles “
      Tou are being simplistic. Do the sums. If the 225 spend 5 million each per month, that’s about 13.5 billion a year. But the CEB’s loss is 600 billion. That comes from selling electricity below cost. So, the real thieves are the voters who accepted cheap electricity.
      Look inwards.

  • 0
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    I have tired of the complaints of shortages and bankruptcy.
    An MP must check beforehand if he has the wherewithal to be one.
    The first requirement is his ability to be on his own feet. If you would need government subsistence to carry out your duties, the job is not for you!
    We keep silence on the monetary constraints these MPs put the public into.
    If you are unable to afford the rent on a house, you should not contest to be elected.
    Cars are official vehicles; Should never be considered your personal property.
    Etc., etc.

    • 0
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      I am tired …

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