Lessons learnt and way forward for power sector reforms in Sri Lanka

In the South Asian region, critical factors for the success of reforms were found as instability in political will, poor overall acceptance, slow adoption, and poor transition management. Therefore, strict monitoring of compliance with the proposed time targets cannot be negotiated, implementing the reform process in a holistic approach on a sound legal framework with a defined institutional arrangement is integral and it facilitates managing the transition properly

The power sector reforms were initiated in the 1990s to overcome inefficiencies that emerged in vertically integrated monopoly electricity entities, swelling of subsidies, and financial constraints in the countries and the sector. Therefore, the structural reforms were geared to achieve; 1). Regulation through independent entity 2). Restructuring through unbundling vertical integrated monopoly utilities and corporatisation of the same 3). Private sector participation for generation and distribution 4) Competition aiming for a wholesale power market. 

Accordingly, expected; 1). The economised decisions from the restructured utilities for efficient operations and optimal resource allocations. 2). Cost recovery electricity prices from the independent regulator for a reasonable return on investment and cover the cost of the ongoing operation. These both together will lead to the least cost investment in generation, transmission, and distribution enabling the sector to achieve 1). Security of supply and quality of service 2). Fiscal affordability. Later in 2015 the adoption of affordable and clean energy, the Sustainable Development Goal 7 (SDG 7), and the Paris Climate Accord changed the landscape of reforms by inclusion of objectives for electrification and decarbonisation.

1. The challenges identified by the development agencies on power sector reforms through implementations in developing countries over multiple decades are worth looking at before embarking on the reform process. Therefore, the challenges are elaborated against the experiences related to Sri Lanka as the reform process is at the doorstep. 

The reforms cannot be applied to each country alike due to specific domestic factors. This is crystal clear in the 1993 policy paper of the World Bank that “there can’t be any standard approach for all countries, countries should select the proper options and mechanism and pace of reform according to the context. Therefore, localisation of the process instead of parachuting is appropriate to satisfy the stakeholders’ appetite in the country. Unless the process is stuck midway as most developing countries experience the creation of regulator and private participation for generation and distribution by leaving all the other steps of reforms aside. 

The midway reformed power sector of Sri Lanka provides the world with the best example. The sector claims no cost recovery, no investment in candidate power plants, shortage of capacity, power shredding, weak regulatory framework, and weak regulator, burgeoning subsidies, accumulated inefficiencies due to monopoly integration of utility, instead economic decisions politicise decisions with vested interests and, lack of transparency and accountability.

2. The traction of the reform is directly related to political will as the power sector of developing countries is used by politicians to work hand to hand with communities to sustain political agendas. The non-enforcement of the Electricity Reform Act No 28 of 2002 fully in Sri Lanka demonstrates a living example in this respect. Further, as the reforms are announced it can be seen a huge gap between implementation and the announcement in most developing countries due to lack of will, for example, Tajikistan, Tanzania, Kenya, and Senegal.

3. The private sector’s participation in the generation and distribution of only about 40% during the reform implemented period of the developing countries, the investments were mostly skewed in oil, wind, solar, and biomass. Sri Lanka after the liberalisation of generation to the private sector, has achieved a progress rate of 30% which is far below the average figures of developing countries, and also noticed that investments are concentrated in smaller capacities mini hydro and wind plants. The low participation of the private sector is envisaged due to the lousy legal framework and investor doubt on strike-off the risk between the public and private sector.

4. Few countries only introduced wholesale power markets where the regulatory framework is robust with a proper governance structure and the power network is substantially large. Therefore, only one out of five countries has achieved the reform target of wholesale power markets. However, most developing countries are operating with a single-buyer model as Sri Lanka does at the moment. Therefore, it is proven that the wholesale power market would not be successfully implemented without the appropriate regulatory framework and institutional settings and those are prerequisites. 

5. Application of Good Corporate practices for finances and human resources, it is proven that financial discipline and human resources are directly related to the performance of the utility for cost recovery and distribution efficiency. In Sri Lankan context, a comparison of LECO with the four distribution licensees of CEB exhibits how LECO has improved its efficiency through financial discipline and the optimum use of human resources. When CEB is accumulating losses LECO is accelerating the net wealth of the company and extending the lending facilities to CEB.

6. The adaptation of the regulatory framework is not on a full-scale basis when utilities are under state control, hence the tariff-setting process is not cost-reflective and transparent due to the heavy involvement of the Ministry of Finance. In this circumstance harnessing private sector participation in the industry is jeopardized. The autonomy of the regulator is at risk and the industry is not thriving as expected in reforms. In the case of Sri Lanka, it is evident that it created the regulator, the Public Utility Commission of Sri Lanka (PUCSL) without the fully pledged autonomy and accountable regulatory framework. Therefore, all electricity tariff revisions in the country even after the PUCSL was established were triggered by the line Ministry even though it is the duty of the regulator. When utilities are owned by the state the implementation of regulatory directions is weakened.

7. Difficulty in the sustainability of full cost recovery has made the utilities financially nonviable, hence the sector is demanding the tax money of the public to maintain the electricity supply making a burden on the Treasury. Due to the malfunctioning of the tariff-setting process by the PUCSL, the electricity tariff remained far below the cost of supply for over a decade distorting the industry. The peculiarity of the remaining tariff was that it did not even cover the direct generation cost of electricity when almost all the developing countries recovered operational costs through the tariff. This exhibits that the regulator has neglected its prime objective, hence the industry was in turmoil.

Power reforms in Sri Lanka

The electricity sector reforms in Sri Lanka remarkably cruised from the year 1969 with the incorporation of the Ceylon Electricity Board (CEB) by taking over the Department of Government Electrical Undertaking functions. The prime aim pursued in this transformation was to develop and maintain an efficient, coordinated, and economical system of electricity supply to the country.

Fourteen years later, reforms were triggered in 1983 by the incorporation of Lanka Electricity Company Ltd. as a state-owned electricity distribution company by taking over some designated areas of electricity distribution from the Councils with the aims of 1). Improvement of electricity supply quality 2). Reduction of technical and commercial losses 3). Improvement of billing and collection 4). Minimisation of disparities in retail prices of electricity in different areas 5). Improvement of public relations 6). Improvement of quality of management. 

After another 13 years of breaking the monopoly in power generation, the competition was created through private sector participation through Independent Power Producers (IPPs) and Small Power Producers (SPPs) in 1996. Later in 2000, the CEB was administratively unbundled into six divisions of generation, transmission, and four distributions internally without separating the divisions legally or financially. The creation of divisions was kicked over to anticipate prospect reforms in CEB.

However, power sector reforms in the legal framework emerged in 2002 with the enactment of Electricity Reform Act No. 28 of 2002. The purposes of the Act are to regulate the generation, transmission, and distribution of electricity supply in Sri Lanka, to incorporate the public companies to take over functions of CEB and LECO for that purpose, and to repeal the CEB Act. Accordingly, the Public Utilities Commission of Sri Lanka was established by the Public Utilities Commission Act, No. 35 of 2002 as the regulator of the sector. The other purposes of the Act were not implemented due to opposition from the political and trade unions of CEB. Therefore, the envisaged reforms of the sector were not accrued to the citizens, in 2009 Electricity Act No. 20 was enacted with a single-buyer model recognising the transmission division in CEB as the single buyer. Accordingly, CEB now holds six licences from the PUCSL for its six divisions created internally.

In this circumstance, the outcomes of midway reforms of CEB are; The level of electrification of the country has reached approximately 99% and the installed capacity of electricity generation is around 4,186MW out of it 27% is from Independent Power Producers (IPP). LECO accounted for around 11% distribution of electricity while the CEB held 89% of it. The number of employees is around 21,364 and per capita electricity consumption is 687 kWh. The CEB is incurring losses continuously from 2016 to date and it accumulates a colossal amount of 555.4 billion and debt stock of 469 billion by the end of the year 2022. 

Further, the integration of renewable energy into the grid has become a tug-of-war among the respective parties leaving aside the achievement of SDG 7. In this backdrop, and with the current economic misery of the country, reforms are inevitable and reforms have become a prerequisite to the bailout package of IMF and it’s a demand by the major lenders to GOSL for restructuring of their debts. 

Way forward for reforms

The Government has already embarked on the reform process and announced it with the approval of the cabinet of ministers. In this respect, the management of CEB has taken a leap-frogging bold decision by proposing the setting up of legally separated commercial entities for functions of CEB with the private participation of strategic partners. The history of the power sector never provides such an exemplary commitment from CEB for any structural changes proposed to CEB. The world experience and Sri Lanka have proved that the political will and the engagement championed the reform unless it ends up with old wine in a new bottle at immense cost to the public. Therefore, the reform process should be phased out properly like; unbundling, regulator, incorporation of new entities, human capital management, and power market. In this respect, the setting up of high-ended authority is essential to drive the reform process without red tape, and bureaucracies in government decisions. 

In the South Asian region, critical factors for the success of reforms were found as instability in political will, poor overall acceptance, slow adoption, and poor transition management. Therefore, strict monitoring of compliance with the proposed time targets cannot be negotiated, implementing the reform process in a holistic approach on a sound legal framework with a defined institutional arrangement is integral and it facilitates managing the transition properly. The proposed framework shall address the mitigation mechanism for seven challenges discussed in the preceding section. Further, the top priority must be on regulatory, institutional, and human capacity frameworks for managing the challenges of transition. Incessant review of reform policy pronouncements, documents, committees, and commissions should be carried out to suit the current ground realities. As the ambiance for reforms is embraced as never before, the persistent political will with a sound framework and well-defined process no wonder flourishes sustainable public benefit through the reform. 

(The writer is a senior Chartered Accountant, has over 25 years’ experience and has been engaged in the power industry for over a period of 20 years. He could be reached via email at [email protected].)