Reforming energy sector an absolute necessity

This week the third player entered the Sri Lankan energy market with the China-based company Sinopec commencing operations. This is a major step in reforming the loss-making Ceylon Petroleum Corporation and allowing for competition in the energy sector. 

Though this is most welcomed the liberalisation of the sector must be done with transparency to ensure that the process is not marred with doubts of corruption leading to eventual backlash to these much needed reforms. Sri Lanka’s decision to open its petroleum market to international players has been driven by the urgent need to secure approximately $ 500 million monthly for fuel imports amid severe foreign reserves and currency crises.

Previous attempts at reforming the CPC and the loss-making Ceylon Electricity Board were hampered by trade union actions. This has cost the taxpayers in a multitude of ways. The two monopolies have piled up hundreds of billions of rupees in debt while at the same time providing energy at a significantly high price. In addition to the cost of subsidies, the taxpayers have carried the losses of these corporations.

The move by the current administration to bring in a third player to the energy market in addition to the State-owned CPC and the Indian Oil Company will hopefully establish long-term energy security and reduce the costs to the Government.

At present the State is bearing the cost of 420 Government institutions and enterprises. There are 52 strategic State-Owned Enterprises (SOEs) termed as State-Owned Business Enterprises (SOBEs), monitored by the Ministry of Finance, 87 SOEs with strong commercial aspect, monitored by the Department of Public Enterprises and 117 SOEs that are non-commercial entities, monitored by the National Budget Department. SOEs represent a key element of the Sri Lankan economy, being prevalent in strategic sectors such as energy, water, ports, banking, insurance, transportation, aviation and construction. The annual loss of the major 52 SOEs alone amounted to a staggering Rs. 966 billion in the first half of 2022.

Losses incurred by SOEs has long been an issue that has worsened fiscal problems in Sri Lanka which has contributed significantly to the current economic crisis. Prolonged losses by SOEs, partly due to unsound decisions made by policymakers, have resulted in large budget deficits; and despite the need to reform critical SOEs, successive Governments have failed to achieve this in a genuine and sustainable manner.

Political appointees, poor governance and management, absence of market-based pricing and powerful trade unions that scuttle both good and bad reforms have been some of many perennial issues plaguing Sri Lanka’s SOEs for decades. With the country in the midst of an unprecedented economic crisis, the public coffers can no longer afford to be burdened with financing such inefficient entities. Addressing the matter of SOEs must go hand-in-hand with the rest of the Government’s economic priorities if Sri Lanka is to emerge clear from its current economic crisis.

If done correctly the reform of the CPC could be a blueprint to State-wide reform necessary with SOEs. From the CEB to SriLankan Airlines, it is necessary to stem the bleeding of these financial sinkholes and ease the burden of the public who are being taxed to keep them afloat. The liberalisation of energy is a difficult but necessary policy that the Government should pursue irrespective of obstacles.