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Power sector reforms- urgent need to revisit them

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by Dr Janaka Ratnasiri

The government of Sri Lanka (GoSL), in a policy decision made in 1998, expressed its commitment to power sector reforms and embarked on a programme to restructure it by unbundling the Ceylon Electricity Board (CEB) into separate companies for generation, transmission, and distribution, as reported in the ADB Report on Country Assistance Programme Evaluation: Power Sector Assistance Evaluation, August 2007. To give effect to this policy, a Bill was drafted to introduce reforms in the power sector as far back as 2002.

ELECTRICITY REFORMS ACT 28 OF 2002

The draft titled Electricity Reforms Bill was presented to the Parliament in 2002, outlining sector reforms comprising restructuring of the electricity industry by breaking the Ceylon Electricity Board (CEB) and Lanka Electricity Company (LECO) into several independent state-owned companies to carry out generation, transmission, and distribution functions.

The Bill proposed that independent companies be incorporated for the following purposes:

One company to take over the functions of the CEB relating to hydroelectricity generation and thermal electricity generation,

One company to take over the functions of the CEB relating to transmission and bulk procurement of electricity,

Three or more companies to take over the distribution of electricity, and

One or more companies to take over other functions of the CEB and LECO.

The Bill when presented to the Parliament brought in strong protests from many quarters including the CEB trade unions and other trade unions as well as from several political parties. They saw this Bill as an initial step towards privatizing the CEB and consequently loss of employment for its staff. Once the government gave the workers an assurance that the workers’ rights would be safeguarded, the protests died down and the Bill was passed in March 2002. It was gazetted as Electricity Reforms Act No. 28 of 2002 on 13 December 2002. However, the necessary order to give effect to the Act was not gazetted by the Minister and as a result the Act did not come into operation.

 

ENERGY EXPERT’S RECOMMENDATIONS FOR UNBUNDLING THE POWER SETOR

Prof. Priyantha Wijayatunga, Director of the South Asia Energy Division of Asian Development Bank (ADB) said at the launching of the Techno 2019 exhibition held in July 2019, that “Sri Lanka still needs to go a long way in relation to sector governance, compared to other countries in the region. It is time that we look at this closely so that we do not lag behind. Reforms will undoubtedly help the energy sector and hence the country’s economic development,” (Daily Mirror, 18.07.2019).

He specifically pointed out that improved governance in the energy sector in India and Bangladesh enormously helped conceptualizing and implementing clean energy initiatives, while enhancing their energy security. He highlighted the important role played by independent energy regulators and separation of functions of the energy sector in these countries, which had paved the way for breakthroughs in clean energy initiatives. 

Prof. Wijayatunga elaborated “By now, a large majority of the countries, including many in the developing world around us, have fully unbundled the energy supply industry with a reasonably independent regulatory environment. If we look at South Asia, India and Bangladesh have already significantly advanced and are rapidly progressing in these areas,”.  Further, he noted that “reforms also led to an increase in private sector participation in all sub sectors, including generation, distribution and even in transmission business in these countries”. 

 

RECOMMENDATIONS OF INTERNATIONAL ORGANIZATIONS

The GoSL, from time to time, engaged the services of international institutions such as World Bank (WB), Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA) to make recommendations to improve the power sector. Among the reports produced from these studies are:

JICA Master Plan Study on the Development of Power Generation and Transmission System in Sri Lanka, February 2006,

Asian Development Bank report on Assessment of Power Sector Reforms in Sri Lanka, 2015,

JICA Report on Electricity Sector Master Plan Study in Sri Lanka, March, 2018, and

World Bank Group study on Sri Lanka Energy Infrastructure Sector Assessment Programme (InfraSAP), April 2019.

The 2006 JICA report observed that “political intervention is making it impossible for the CEB to manage itself autonomously. As a result, its management has been criticized as inefficient by external parties. Moreover, it has piled up a debt big enough to jeopardize its continued sustenance. One of the areas where politics has been heavily involved is the tariff question. Thus far, political considerations have worked against attempts to raise tariffs, and tariff revisions to reflect the costs have consequently been delayed. To put a halt to political intervention in CEB management as well, it is necessary to lay down the proper conditions for corporate business. This is to be done by unbundling the current CEB, which is a vertically integrated government-owned monopoly; making the generation, transmission, and distribution divisions completely independent”. The report further recommended that “a fundamental reform of the sector is absolutely essential for promotion of long-term investment and increase in the overall efficiency. To this end, the government must present a detailed vision and schedule for CEB unbundling, and swiftly complete the reform, which is currently stalled.” But no follow up action was taken by the GoSL towards unbundling of the CEB.

The 2015 ADB report in its concluding paragraph said that “The next stage of reform requires establishing six independent companies out of the CEB’s generation, transmission, and four distribution licensees. The organization culture in the government-owned company LECO needs to be replicated in the CEB’s distribution licensees by creating corporate entities that report to the CEB holding company. The functional business units currently established within the CEB are adequately staffed and organized to enable the formation of six corporate entities. The corporatization need not involve privatization if political decision makers do not wish to involve private capital more fully in the sector, provided the state-owned firms operate as independent commercial companies”.

The ADB report further said that “The electricity sector was proposed to be restructured to ensure increased efficiency, transparency, autonomy, accountability, competition, and financial viability. The CEB functions were to be vertically and horizontally unbundled. For this purpose, the CEB owned subsidiary companies were planned to be established under the Companies Act No. 17 of 1982. The electricity sector was proposed to be restructured to ensure increased efficiency, transparency, autonomy, accountability, competition, and financial viability. The CEB functions were to be vertically and horizontally unbundled. For this purpose, CEB owned subsidiary companies were planned to be established under the Companies Act No. 17 of 1982”.

The 2018 JICA report reviewed and updated the 2006 JICA Master Plan. However, it did not refer to the issue of unbundling the power sector but recommended incorporation of renewable energy projects as well as natural gas in the energy mix for generation of electricity up to 2040 including consideration of financial commitments. It also considered the option of generation with 100% renewable energy sources by 2040, recommending that to meet the deficit of power arising out of continuing high cloud cover for several days, storage batteries need to be installed at an estimated cost of USD 1,000 million.

The 2019 World Bank report says “Apart from a few recent competitive outcomes, the country has not yet been able to develop utility scale non-conventional renewable energy (NCRE) projects at tariffs comparable with other projects globally or in the region or to tap into commercial financing and private sector participation in larger scale projects. As part of the preparation of the InfraSAP, two pre-feasibility assessments for potential large scale NCRE park sites were conducted for sites in Pooneryn and Moneragala, respectively, totaling about 500 MW of potential generation capacity”.

“The Solar and Wind power has the potential to further optimize the cost of power in the country. In line with what is being witnessed across the globe (i.e. low tariffs in solar and wind-based generation), it seems reasonable to assume that by opening the sector to international players with adequate incentives and risk mitigation mechanisms in place, a significant reduction in cost of power could be achieved in Sri Lanka. The solar and wind-based generation could be potentially used to replace some of the expensive imported oil-based power, which is currently utilized to offset the low availability of hydro resources” (p. 17).

Though the government sought the assistance from these multilateral agencies for improving the performance of the CEB, it has not taken any initiative to implement them, particularly those on reforms. The CEB is also rather slow in pursuing building of large-scale solar energy systems despite the government giving high priority for them and availability of funding from India on a credit line to the extent of USD 100 million specifically for solar energy project development (See The Island of 03.09.2020)

 

PRE-REQUISITES FOR UNBUNDLING OF CEB

Once the CEB is unbundled, separate companies are to be set up to take over the generation, transmission, distribution and other functions. There will be one company each for generation and transmission and three or more for distribution, according to the draft Act. However, it will be more prudent to have separate generation companies for each of the generation complexes, Kelanitissa, Laxapana, Mahaweli and others including large renewable energy plants. These companies will serve as independent power producers (IPP) and will have to sell the energy they generate to the transmission company, along with other IPPs. Electricity generated at power plants other than from small power plants, is transmitted to grid substations using 220 kV and 132 kV transmission lines.

When the available capacity exceeds the demand, the System Controller will have to decide the amount of power to be purchased from the IPPs based on a merit order system. Generally, plants providing firm output at low cost is given priority according to which power from renewable sources may get low priority. However, with the government policy to meet a minimum of 80% of generation from renewable sources, a mechanism will have to be worked out to accept power from RE sources, possibly by providing storage facilities which will even out their fluctuations.

Before selling energy, it has to be measured to an accuracy of at least ±0.1% using instrumentation which need to be type approved by the Department of Measurement Units, Standards and Services (MUSS) as required by the relevant law. Further, the instruments need to be regularly calibrated by an accredited laboratory. The CEB is already having a Meter Laboratory and this may have to be brought under the control of the transmission company with updated instrumentation serving as secondary standards with accuracy traceable to international standards. This can be verified by calibrating them against the primary standards available at MUSS Department, which is a legal requirement. Every generating unit before being connected to the grid for transmission, needs to go through the metering unit which will monitor the energy dispatched on a daily or monthly basis and transmit the data to the transmission company. It will then pay the IPP at rates agreed to in the power purchase agreement entered into between the IPP and the transmission company, based on the energy dispatched.

For distribution, the CEB has already divided the country into four regional divisions and a subsidiary company, Lanka Electric Company Ltd, covering the Western coastal townships from Negombo to Galle, excluding the city of Colombo. Electricity distribution from 220 kV/132 kV grid substations to the rest of the country is carried out using 33 kV lines which are again converted to 11 kV at load centres for local distribution. The 33 kV or 11 kV line voltage is again converted into 230/400 V for supplying to consumers. Currently, one 33 kV line may extend across two division boundaries, but if these two divisions are to be set up as two independent companies, there has to be separate distribution lines, each covering only one division receiving electricity from one or more GSSs located within the division. It will be then possible to measure the amount of energy transferred to this particular distribution company separately. Hence, certain amount or modifying the distribution system may have to be undertaken prior to unbundling.

 

FINANCIAL VIABILITY OF CEB

The CEB has been selling electricity to most of its consumers below cost price which is around Rs 20 per unit. For example, the tariff for households consuming up to 90 kWh per month is only Rs. 10 per unit for the last 30 units and less for lower slabs. For industries with demand up to 42 kVA and for other industries during daytime, the tariff is below the cost price. The average cost of generation per unit of electricity in 2017 was Rs 20.40, while the average selling price per unit in 2017 was Rs. 16.26. The corresponding values for 2018 were Rs. 19.12 and Rs. 16.29, respectively. These low tariffs resulted in the CEB incurring a net loss of Rs. 47.6 billion in 2017 and Rs. 30.5 billion in 2018 (AR, 2018).

In view of these losses, the CEB has not been able to settle its dues to the Ceylon Petroleum Corporation (CPC) for supplying fuel in 2016 amounting to Rs. 12.43 billion and also to settle the payments to IPPs for supplying power which amounted to Rs. 21.52 billion in 2016, according to General Manager’s Review appearing in the 2016 Annual Report (AR). Further, the total long-term borrowings as at end of 2016 were recorded as Rs. 220.5 billion, while that for 2018 were recorded as Rs. 281.3 billion, as given in respective annual reports. This poor financial status of CEB is an impediment for it to raise any borrowings from commercial banks.

The subsidies given to low-end consumers amounted to Rs. 70 billion in 2017 and Rs. 60 billion in 2018 (AR 2018). These were partly recovered by selling to high-end consumers at above-average cost price. The surplus recovered by these means in 2017 was Rs. 15.2 billion and Rs. 20.6 billion in 2018. Had the CEB was operating as a commercial enterprise, the logical measure that would have been done was either to increase the selling price above the cost price for all consumers and also reduce the cost of generation.

Being a government organization, the tariff is determined by the government policy to provide electricity to low-income households at an affordable price and hence the CEB is constrained against raising the tariff. However, this issue needs to be carefully studied and an upward revision of the tariff should be considered, removing the subsidies at least partly. Even for industries, to make them competitive in the global market, the government policy is to supply electricity to small and medium industries at below cost, but this policy too needs to be reviewed.

There is also the possibility to reduce the cost of generation. The CEB has been generating electricity from petroleum oil to the extent between 25% – 35% with the generation in 2017 being 5,000 GWh. According to 2016 Generation Performance Report of the Public Utilities Commission of Sri Lanka (PUCSL), the cost of generation from oil-fired power plants has been between Rs/kWh 22 and Rs/kWh 38. On the other hand, the cost of generation from NG fired power plant is no more than Rs/kWh 15 as quoted in the tender for the 300 MW gas power plant to be installed at Kerawalapitiya. If the thermal power plants presently operating with diesel are converted to NG, the saving is of the order of Rs. 50 billion annually.

 

The Cabinet of Ministers as far back as December 2010 decided to introduce natural gas (NG) in all sectors including power and industries and authorized the Ministry of Petroleum to pursue the matter, but no action was taken either by the Ministry of Petroleum or Ministry of Power and Energy. It is hoped that with the mandate given to the Ministry of Renewable Energy to convert all oil power plants at Kelanitissa complex for operation with NG, will inspire the CEB to give priority for this conversion which will reduce the losses incurred by the CEB.

The other matter that needs to be resolved is the delay in public sector organizations not paying up their bills for electricity on time, and this has caused liquidity problems in the CEB. As a result, the CEB is unable to pay the CPC for the fuel it purchases from the CPC on time and also unable to pay the IPPs for the power it purchases from them on time. With the unbundling of the sector, this system could be improved. Every Distribution Company (DC) should collect the payments due from the consumers on time giving a grace period of say one month. The Transmission Company (TC) should collect the payments from every DC for the electricity sold to them on time and settle the payments due for each of the Generation Companies (GC) on time. The GCs could then settle the payments due for each of the IPPs for the electricity they purchase from them. With the availability of on-line banking facilities and smart metering systems, all these operations could be undertaken without human intervention, other than occasional verification.

 

PRESENT STATUS OF SRI LANKA’S POWER SECTOR

In 1969, the Ceylon Electricity Board (CEB) was established by an Act of Parliament for the purpose of developing and coordinating of generation, supply and distribution of electricity island-wide, taking over the functions of the Department of Electrical Undertakings. By the end of 2018, the total installed capacity has grown to 4,045 MW of comprising 1,400 MW of hydropower plants, 1,137 MW of oil power plants, 900 MW of coal power plants and 608 MW of other renewal energy plants owned by both CEB and independent power producers. The total electricity generation in 2018 was 15,300 GWh, with the per capita electricity consumption 650 kWh, which is only above the least developed countries in Asia. The forecast for generation in 2030 given in CEB’s long term generation plan is around 31,000 GWh.

In 1983, Lanka Electric Company was established as a subsidiary company of the CEB and took over the distribution of electricity in coastal townships between Negombo and Galle, which resulted in reducing the distribution losses. In 2007, the Sri Lanka Sustainable Energy Authority (SLSEA) was established with the main objective to identify, assess and develop renewable energy resources in the country. However. The SLSEA has been operating more as a regulator than as a promoter of RE projects.

It is noteworthy to compare Sri Lanka’s power sector situation with that of another Asian country, Taiwan, where the population in 2018 (23.78 million) is similar to that of Sri Lanka (21.67 million) and land area (36,200 sq. km) is almost half of Sri Lanka’s (65,610 sq. km). Taiwan’s installed capacity in 2018 was a staggering 44,600 MW comprising 13,000 MW of coal power plants, 16,000 MW of natural gas power plants and 4,500 MW of nuclear power plants, generating 275,500 GWh of electricity in 2018 giving a per capita consumption of 11,585 kWh compared to 650 kWh for Sri Lanka (Wikipedia). The rapid growth of industrialization has been the main driver of the power sector, with a GDP (nominal) per capita of USD 24,800 in 2018 compared to USD 4,100 for Sri Lanka. It will be interesting to find out how Taiwan was able to achieve such high performance in the power sector – whether superior competency and dedication of professionals or correct policies in place or strong political leadership.

 

LACK OF TRANSPARENCY IN SELECTING MAJOR PROJECTS

Unlike in many Asian countries, Sri Lanka has been able to provide electricity to almost 100% of households, which was made possible through funding made available through decentralized budgeting in which provision of electricity to rural villages has been given priority. While the national grid was extended to cover almost the entire island to meet the power demands of every industry, commercial establishment and household, the CEB has not been able to expand its generation capacity correspondingly.

Efforts to build a coal power plant kept dragging for over 20 years at the beginning of the mid-eighties due to the CEB’s failure to initiate a dialogue with the public and concerned parties and vacillating policies of the government. Instead of inviting bids for building a power plant meeting performance and emission specifications from reputed manufacturers internationally and selecting a plant in a transparent manner, the CEB accepted a plant based on outdated technology offered by China on credit. The plant is known to breakdown repeatedly and the CEB is compelled to retain Chinese technicians even today to attend to its maintenance. Though the CEB claims that the coal power plant generates at the lowest cost, when the cost of financing is added, the cost gets more than doubled as revealed by a study undertaken by World Bank team.

On three occasions between 2000 and 2010, Sri Lanka government announced calls for expressions of interest for building thermal power plants on BOOT basis with capacity 1,000 – 1,200 MW, but pursued none. This gives a poor image of Sri Lanka within the international power industry, as the investors have to incur heavy expenditure on site visits and making bid bonds. In one announcement, the fuel option was kept open to solid or liquid or gas and the site to be selected by the investor while in another, the fuel option was specified as coal with the site to be near Hambantota.

In 2005, India offered to build a 500 MW coal power plant at Sampur, near Trincomalee on cost-sharing basis. Negotiations between the Indian party and the CEB kept dragging for five years before the final agreement was entered into and another five years to get feasibility studies and environment impact studies completed as well as other clearances obtained. By that time, the new government had changed its policy to adopt gas power rather than coal power on environmental grounds and the project was aborted. Had the CEB not taken such a long time to finalize the terms and commenced work sooner, the plant would have been built by now. It needs to be stressed that the proposed coal power plant at Sampur was abandoned because the CEB was dragging the project for nearly 10 years. The project took so long to commence work, obviously because it had problems both technical and operational which the CEB was unable to resolve. Hence, it was best to cancel the project and consider a new project afresh.

The latest attempt to build a 300 MW gas power plant at Kerawalapitiya on BOOT basis also got dragging for nearly four years mainly because of the manner in which the project selection process was handled by the CEB. A 500-page request for proposal (RFP) was announced in November 2016 seeking unnecessary details while the more important information essential for making a decision was left out. Such detailed information would have been in order had CEB was paying for the capital expenditure. With a BOOT project, the investor will ensure that a plant worth the money would have been purchased. The CEB will only have to know the price at which energy be sold to CEB and whether the plant satisfies performance and emission specifications laid down by the CEB.

The lack of clarity in the RFP resulted in the matter taken to the courts for a ruling. Though the approval of the Cabinet has already been granted for the project and the new President has directed this project be given priority soon after he was elected, the CEB has still not finalized its acceptance. Instead, the CEB is pursuing building a 300 MW coal power plant at Norochcholai against President’s policy. Incidentally, China was allowed to build a 400 MW gas power plant along with an LNG terminal at Hambantota with no such detailed RFPs announced.

According to a SLSEA Report dated 27.03.2019, several RE projects submitted by investors that have received the approval of the SLSEA since 2016 have been held up as CEB has not agreed to sign power purchase agreements with them, citing a section of the Electricity Act. This includes 101 RE projects with total installed capacity of 3,052 MW comprising 264 MW of mini-hydro plants, 2,028 MW of solar plants, 673 MW of wind plants and 87 MW of other plants, which could generate over 7000 GWh of energy annually. This situation is shown in Fig. 2 in 2018 Annual Report where the growth of energy added from RE projects to the system shows a stagnation between 2015 and 2018, with the value for 2016 showing a drop of 200 GWh compared to other years. It appears that there was no coordination between the CEB and the SLSEA.

 

FLAWED LONG TERM GENERATION EXPANSION PLAN

The CEB during the last few decades has been preparing biennially a long-term generation expansion (LTGE) Plan and the mandate of the Power Ministry specifies that the sector should be developed to comply with the CEB Plan. It is supposed to determine which power technology will be the cheapest in 20 years hence based on current prices. With the cost of generation depending on plant capital cost and fuel prices both of which could vary widely within a span of 20 years, it is futile to make forecasts now as to which technology is the cheapest in 20 years hence and to adopt it. Therefore, to give a mandate to follow the CEB’s LTGE Plan which is highly flawed for the development of the sector, does not make sense. The CEB Plan for 2018-2037 recommends adding 2,700 MW of coal power plants between 2023 and 2037 under Base Case scenario saying it is the cheapest option. However, the 2019 World Bank report cited above says in p. 18 that “coal ceases to be the least cost source of power generation, as cost of power from LNG and NCRE could potentially be lower than US cents 9 / kWh” which is the estimated coal power price.

When the CEB submitted its LTGE Plan for 2018-37 to the Public Utilities Commission of Sri Lanka (PUCSL) for approval as required by the Sri Lanka Electricity Act No. 31 of 2013, PUCSL did not approve it but proposed an alternative plan incorporating natural gas power plants in place of coal power plants included in the CEB Plan. The CEB refused to accept this recommendation and the dispute between the PUCSL and the CEB kept dragging for over a year, and the matter was finally referred to the President who gave a directive to the PUCSL to approve the CEB Plan, fearing disruption to the power supply in the country after the CEB Engineers’ Union threatened to resort to industrial action if their demand for coal power plants is not acceded to. This is a clear indication that Sri Lanka’s power sector is being governed not by the PUCSL nor the Ministry nor the Governing Board of the CEB, but by its trade unions. This justifies Prof. Wijayatunga’s statement that “Sri Lanka still needs to go a long way in relation to sector governance”.

 

CONCLUSION

The CEB ha a staff strength about 23,000 with over 1,400 professionals. It is the opinion of several international agencies that this organization be split into several organizations each responsible for different functions undertaken by the CEB, including generation, transmission and distribution. It is expected that such an unbundling process will improve the efficiency, transparency, autonomy, accountability, competition, and financial viability. The CEB has failed miserably in the recent past to increase the generation capacity to meet the growing demand with due consideration for environmental concerns even after granting Cabinet approval for many of them. It has also failed to initiate work on large renewable energy projects for several years, particularly during the last seven months even after the President’s policy of pursuing renewable energy and gas power projects was announced.

Possibly the high inertia of the CEB with its large staff prevents it from being flexible to undertake new projects in keeping with international trends and hence continues to insist on outdated technologies. Hence, it is desirable if the government initiates unbundling of the CEB urgently as recommended by reputed energy experts to make it more flexible. The unbundling will also give an opportunity for the government to get rid of dead wood after giving them a golden hand shake.



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Now is the time to rethink trade

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ranil - sajith - anura

by Gomi Senadhira

During the presidential election campaign, the importance of trade, particularly exports, to Sri Lanka’s was emphasised by President Anura Kumara Dissanayake (AKD) and the other two main contenders in the fray, namely Sajith Premadasa (SP) and Ranil Wickremesinghe (RW) in their manifestos. These three candidates together polled more than 90 percent of the votes at the presidential elections. During the parliamentary elections the political parties which based their campaign on these manifestos – Jathika Jana Balawegaya (NPP), Samagi Jana Balawegaya (SJB) and New Democratic Front (NDF) together polled more than 83%. Therefore, the electoral support for these pro-trade policies is undisputed. For the Sri Lankan export community this should be a superb development, as for many years, the trade policy had been, one of the more contentious areas of island’s politics. Our main trading partners and the foreign investors would also welcome this policy convergence.

Pro- trade policies in the policy statements of RW and SJ were not unexpected. But the pro-trade approach in the AKD’s manifesto surprised many, mainly because all other parties had repeatedly warned the people against voting for AKD as he would turn Sri Lanka into another North Korea or Cuba.

For example, during the election campaign, at a conference organised by the National Bankers Association, RW stated, “On September 4th, MP Anura Kumara Dissanayake emphasised the importance of focusing on exports for our country’s businessmen and industrialists. While this principle is commendable, there is a concern. Their policy statement suggests that Sri Lanka plans to cancel its free trade agreements.

This raises a significant question: how can we develop an export industry without these agreements? Such contradictions pose challenges.” Since then, he had repeated these comments at several other meetings.  In the same way, SP’s trade policy wonks also had spread similar misinformation on NPP policies.  However, the NPP policy statement clearly states its position on Free Trade Agreements, that is “… updating of existing free trade agreements and negotiating new free trade agreements.” The updating of the trade agreements certainly does mean cancelling of these agreements. All FTAs need to be reviewed and updated periodically.

During the election seasons, politicians sometimes manipulate public opinion about the crucial issues by arousing fear. But this is not the time to deliberately mislead the public in general and, more particularly, the business community and our trading partners with false information on trade policy. At this juncture, what we need are facts. Not scare tactics and false information. So, let’s hope our politicians would avoid such scare tactics in the future and join together to strengthen this consensus on export-oriented, outward-looking trade policy.

To those who are familiar with the way the NPP policies evolved in the recent past, their shift towards pro-trade policies is not a surprise. After all, if the NPP and AKD want a socialist model to emulate, they have many examples of socialist governments, other than North Korea and Cuba, to draw lessons from. For example, the success story of the Socialist Republic of Vietnam. While cautiously staying away from the labels AKD’s policy statement refers to Vietnam, Bangladesh, and South Korea (and not North Korea) as export success stories, Sri Lanka can acquire lessons from. More importantly, Vietnam’s success story was also highlighted at the top of RW’s policy statement and by the trade experts in the SJB as a success story to follow. What is needed now is to strengthen this consensus further and develop a pro-export national trade strategy approved by the parliament. That would help to attract much-needed foreign investments and export orders.

If we already have a general consensus on pro-trade and pro-export policies, then why do we need to rethink trade policies now?

From export-oriented economy to import dependent economy

Sri Lanka was the first country in South Asia to liberalise trade policies with the ‘open’ economy introduced in the late 1970s. However, the open economy introduced then was not fully open. It had a strong focus on the expansion of the export of goods while discouraging imports, particularly nonessential imports. A special cess was imposed on the nonessential imports to protect local farmers and manufacturers and to collect funds for export development.

The main thrust of the trade policy was exports. During that period, the government proactively managed to get an adequate level of market access to Sri Lankan exports through multilateral trade rules (GATT/WTO rules) as well as the distortions to those rules (textile quotas). These policies worked well, and during the 1980s and 90s, Sri Lanka’s exports registered almost a fivefold increase, from US$1.35 billion in 1981 to US$6.37 billion by the year 2000. The exports-to-GDP ratio increased from 30.46% in 1981 to 39.02% in 2000. During the period, Sri Lanka was slowly but surely progressing into an export-oriented economy.

Unfortunately, during the next two decades, the export growth slowed down and only increased from US$6.37 billion (in 2000) to US$13.03 billion (in 2020). The exports-to-GDP ratio also declined substantially during this period. At 15.46% in 2020, it was the lowest ever recorded. More alarmingly, the growth of exports during the last decade was almost stagnant, and it increased only from US$ 10 billion in 2013 to US$ 12 billion in 2023. During the same period, Vietnam’s exports increased from US$132 billion in 2013 to US$370 billion in 2023.

Hijacking of trade policy by importers and profiteers

The main reason for this decline was the absence of interest in export development by the successive governments and the influence of the importers, the profiteers and perhaps even hawaladars on trade policy formulations. If one analyses the trade policy formulation in the recent years, it is easy to understand how trade policies and even free trade agreements were directed towards import promotion at the expense of export development. After signing Sri Lanka’s first bilateral FTA with India in December 1998 and second with Pakistan in August 2002, and the enhanced GSP arrangement in the EU, no new tangible initiatives were taken by the government to develop market access for Sri Lankan exports.

During the last decade the situation deteriorated further and even the free trade agreements, which countries normally negotiate at the request and on behalf of their exporters to get better levels of market access for them in other countries, were negotiated at the request of the exporters of other countries to provide them with enhanced market access into Sri Lanka without reciprocal concessions for Sri Lankan exporters. The free trade agreements Sri Lanka signed with Singapore and Thailand are clear examples of this approach.

These agreements were negotiated under RW’s leadership, first as the prime minister and then as the president. Despite his rhetoric about the critical need to swiftly transform Sri Lanka into an export-oriented economy, as stabilising the economy alone would not solve Sri Lanka’s problems due to the country’s heavy dependence on imports, it was under RW’s leadership that the trade policy got blatantly hijacked by the importers mafia and profiteers.

Another adverse development during the last two decades was the relaxation of foreign exchange regulations. Due to this Sri Lanka also does not fully benefit even from the limited amount of exports, as a substantial portion of the export proceeds are not repatriated. In July 2022 the Central Bank revealed that less than 20% of export proceeds are being repatriated by the exporters. Though this may have improved since then, the conversion rate remains below accepted levels. In addition to that, a significant amount of money is transferred out through trade misinvoicing by the exporters and importers.

As the elections are over now it is the time for a new beginning. It is the time to intensify analysis and advocacy regarding the numerous ways that trade agreements and po8licies must be reformed and strengthen the consensus on trade policies and adjust them to undo decades of capture by the importers’ mafia, profiteers, and hawaladars.

(The writer, a retired public servant and diplomat, can be reached at senadhiragomi@gmail.com)

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Navigating Sri Lanka’s economic recovery: Opportunities and risks in the aftermath of Cyclone Fengal

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by Prof. Chanaka Jayawardhena,
Professor of Marketing, University of Surrey, UK.
Chanaka.j@gmail.com

Sri Lanka finds itself at a crossroads. The devastation caused by Cyclone Fengal, which displaced over half a million people, destroyed critical infrastructure, and claimed numerous lives, highlights the country’s vulnerability to natural disasters. At the same time, the nation is tentatively emerging from its first-ever sovereign debt default, buoyed by a $12.5 billion bond swap and an IMF bailout. Together, these events pose an urgent question: Can Sri Lanka navigate the treacherous path of recovery without derailing its fragile economic stability?

The answer lies in the delicate balance the government must strike. Cyclone Fengal is more than just a natural disaster—it is a stress test for the economic goodwill painstakingly built up over the past year. How Sri Lanka’s policymakers respond could define the trajectory of its recovery for years to come. This is not just about reconstruction; it is about rethinking priorities, leveraging the current crisis as an opportunity to build resilience, and ensuring the hard-won economic gains are not squandered in the process.

Cyclone Fengal: A Catalyst for Change or a Step Backward?

The immediate economic impact of Cyclone Fengal is staggering. Agriculture, one of the backbones of Sri Lanka’s economy, has suffered significant losses, with thousands of acres of paddy fields and tea plantations—critical export sectors—being submerged. Damaged transport networks have disrupted supply chains, delaying the movement of goods and escalating costs for businesses and consumers alike. The government now faces the twin challenges of financing disaster relief and rebuilding vital infrastructure, all within the constraints of a tight fiscal envelope.

The human cost is equally dire. Families have lost homes, livelihoods, and loved ones. The socio-economic fallout of such displacement is long-lasting, with vulnerable communities pushed further into poverty. Moreover, the environmental damage, including soil erosion and the destruction of ecosystems, adds another layer of complexity to recovery efforts.

Yet, there is an opportunity amidst this tragedy. Disasters often serve as catalysts for long-overdue reforms. Cyclone Fengal could prompt Sri Lanka to implement policies aimed at climate resilience, investing in infrastructure that can withstand future storms and floods. Such investments would not only protect lives and livelihoods but also reduce the economic disruptions caused by such events. However, realising this opportunity requires vision, coordination, and a clear commitment to long-term planning—qualities that have not always been hallmarks of Sri Lankan governance.

The risks, however, are equally pronounced. With limited fiscal space and the need to adhere to IMF conditionalities, there is a real danger that recovery efforts might siphon funds away from critical economic reforms. If mismanaged, this could erode investor confidence, putting at risk the progress made in stabilising the economy. The government must guard against the temptation to prioritise short-term relief over the long-term restructuring that is vital for sustainable growth.

Debt Restructuring: The Elephant in the Room

Sri Lanka’s recent $12.5 billion bond swap was a bold move to address its debt crisis, but the relief it offers is conditional. Investors and international institutions are closely watching how the government navigates its commitments to fiscal discipline and structural reform. Cyclone Fengal has now added an unexpected layer of complexity to this equation.

The IMF bailout, which released $333 million in its latest tranche, demands not only fiscal prudence but also tangible progress in revenue generation and state enterprise restructuring. These measures, while necessary, are politically sensitive and require a stable economic environment to succeed. The cyclone’s aftermath threatens to upset this balance, with rising expenditure on disaster relief potentially crowding out these reforms.

Moreover, the bond swap itself is not without controversy. While it offers breathing room, it also raises questions about the sustainability of Sri Lanka’s debt strategy. With global interest rates on the rise, the cost of future borrowing could escalate, particularly if the government fails to demonstrate fiscal discipline. In this context, the pressure to deliver results has never been greater. Successfully managing this dual challenge of recovery and reform will be the ultimate test of Sri Lanka’s political and economic leadership.

Lessons from other economies

Sri Lanka is not the first country to face the dual challenge of disaster recovery and economic reform. Indonesia’s response to the 2004 tsunami offers valuable lessons. By channelling international aid into long-term development projects and maintaining fiscal discipline, Indonesia turned a crisis into an opportunity for economic transformation. Key to its success was the establishment of a dedicated reconstruction agency that ensured transparency and accountability in the use of funds.

Bangladesh, another country prone to natural disasters, has demonstrated how investing in disaster preparedness—through early warning systems, robust infrastructure, and community education—can mitigate economic losses. These measures have not only saved lives but also reduced the financial impact of natural disasters, enabling the economy to recover more quickly.

Sri Lanka would do well to follow these examples. The establishment of a specialised disaster management authority with a clear mandate and adequate funding could go a long way in ensuring a coordinated and effective response. Such an agency could also play a critical role in securing international aid, which is often contingent on transparent governance and accountability. Ensuring such mechanisms are in place will be crucial to sustaining international goodwill and ensuring long-term economic stability.

Investing in Resilience

The case for strategic investment in resilience is clear. Renewable energy projects, for instance, could reduce the country’s reliance on costly fuel imports while aligning with global sustainability trends. Sri Lanka’s abundant natural resources—sunlight, wind, and hydro potential—position it well to transition to a greener energy mix. Such investments would not only lower energy costs but also make the economy less vulnerable to global fuel price shocks.

Rebuilding transport and communication networks with a focus on durability would also yield significant benefits. Modern, resilient infrastructure is essential for economic growth, facilitating trade, tourism, and investment. Furthermore, the construction phase itself could create jobs, providing a much-needed stimulus to the domestic economy.

Public health must also be a priority. The cyclone has triggered a surge in dengue cases, exposing gaps in the healthcare system’s ability to respond to emergencies. Strengthening healthcare infrastructure and preventive measures could yield significant economic and social dividends. Healthier populations are more productive, and the costs of prevention are far lower than those of treatment and lost productivity.

Building on Goodwill

Sri Lanka enters this challenging phase with a degree of goodwill that is rare for a country emerging from economic collapse. The Central Bank’s policy rate reforms and the government’s efforts to stabilise public finances have been cautiously welcomed by investors. Moody’s recent decision to place Sri Lanka’s credit rating under review for a potential upgrade reflects this optimism.

However, goodwill is a finite resource. The government must tread carefully, avoiding populist measures that could derail its reform agenda. Transparency in disaster relief spending and clear communication about the trade-offs involved in balancing recovery with reform are essential. Failure to do so could erode the trust of both domestic and international stakeholders.

The risk of political complacency is real. The government’s recent electoral mandate, while overwhelming, should not be taken as a licence to abandon fiscal prudence. Populist policies, such as unsustainable subsidies or tax cuts, could undo the progress made and jeopardise long-term stability.

A Path Forward

Cyclone Fengal has exposed the vulnerabilities in Sri Lanka’s economic and social fabric, but it has also provided an opportunity to address them. The government’s response must be both immediate and strategic, balancing the urgency of disaster relief with the long-term necessity of economic reform.

First, the government must prioritise investments that yield both short-term relief and long-term benefits. For example, rebuilding flood-damaged roads and bridges with climate-resilient materials can create jobs today while reducing costs in the future. Second, it must strengthen institutions to ensure that recovery funds are used effectively and transparently. Third, it must actively engage with international partners, not only for financial support but also for technical expertise in disaster management and economic planning.

Sri Lanka’s recovery is not just a matter of economics; it is a test of governance, competence, and foresight. By investing in resilience, maintaining fiscal discipline, and leveraging international goodwill, the country can navigate this crisis and emerge stronger. The stakes are high, but so are the potential rewards. This is a moment for bold but measured action—a chance to turn adversity into a turning point for sustainable growth.

The eyes of the world are on Sri Lanka. Let this be the moment when it rises to the challenge.

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Protecting blue carbon ecosystems, a key to climate resilience

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By Ifham Nizam

Blue carbon ecosystems, such as mangroves and sea grasses, are emerging as critical players in global climate mitigation strategies. However, these ecosystems face mounting challenges due to coastal development, climate change, and mismanagement.

Speaking to The Island, renowned expert Dr. Mat Vanderklift, Director of the Indian Ocean Blue Carbon Hub, who is on a short visit to Sri Lanka stressed the urgency of integrating high-integrity principles and sustainable practices to safeguard these vital habitats.

Excerpts of the interview

Q: Dr. Can you elaborate on the unique challenges that blue carbon ecosystems, such as mangroves and sea grasses, face compared to terrestrial carbon sinks like forests? 

A:Mangroves and sea grasses are located on the coastal margins, which places them in areas where many activities occur and competition for space is high. Most people live near coasts, so there are pressures from development as well as infrastructure such as ports. They are also spaces where activities like aquaculture and fishing can lead to degradation if they are not done in a sustainable way.

 Q: How do you assess the long-term effectiveness of blue carbon ecosystems in carbon sequestration, especially in the face of climate change impacts like rising sea levels and extreme weather? 

A: Mangroves and ecosystems can cope with sea level rise well enough as long as there is space for them to retreat to – although seawalls, roads and other infrastructure can block them. In some places that can simply rise vertically by accumulating sediment. Extreme weather events like heatwaves are a growing problem, and can cause death of vegetation over large areas.

 Given the complexities of carbon credit markets, what do you believe are the most promising strategies to ensure that blue carbon credits maintain high environmental integrity? We need to follow principles to ensure that our desire to generate credits does not create further damage or infringe on people’s rights. Principles like doing no harm, respecting rights, empowering people, acting and sharing benefits equitably, and using the best available knowledge. We can follow a ‘mitigation hierarchy’ in which we ensure that we protect first, and restore when we need to.

Q: What role do you see for governments in regulating the emerging market for blue carbon credits to ensure its effectiveness in climate mitigation efforts?” 

A: Each government will take a different approach, but some regulation can be helpful. Regulations can help ensure that high integrity principles are followed. Regulations can also help ensure that the right kind of knowledge is generated for a national context. Most nations, including Sri Lanka, have international commitments, and regulation can help make sure that those commitments are realised.

 Q: What are some innovative financial models or partnerships that have shown success in attracting private sector investment for the restoration of blue carbon ecosystems? 

A: Sometimes we don’t need innovation because the mechanisms already exist, we just need to make them work properly. Carbon and biodiversity markets are an example – they have promise, but are not as successful as they could be because there are barriers to effective implementation.

 Q: How can smaller nations or communities with rich blue carbon ecosystems access funding or investment to protect and restore these vital habitats?

A: In some situations, there might be potential to engage with the private sector, and building public-private partnerships can help. These are mostly used for infrastructure projects, but could be harnessed towards climate mitigation and nature protection. In other contexts, some international investment might be needed – the recent climate meeting in Baku finalised some of the international rules under which this can occur.

 Q: You mentioned the importance of blue carbon ecosystems for supporting livelihoods, particularly in fisheries and tourism. How can we ensure that the restoration of these ecosystems also benefits local communities economically?

A: This is fundamental, and part of building markets with integrity. Local peoples need to be involved all the way through projects and need to receive an equitable share of benefits. This might mean a share in revenue from the sale of credits, but it might also mean new business or livelihood generation opportunities. If lives are not improved, there will be little support for climate action or nature protection.

 What are the potential risks or unintended consequences for coastal communities if blue carbon financing schemes are not properly designed or implemented? In some situations, destructive activities are simply displaced elsewhere, so there is no net benefit. In others, locals do not receive an adequate share of benefits, so trust and long-term success is eroded.

 Q: What are some of the key metrics used to assess the health and carbon sequestration potential of blue carbon ecosystems? How reliable are these metrics across different regions? 

A: Measuring carbon is relatively easy. Measuring other benefits, such as improvements in fisheries or improved resilience of a community, is much harder but just as important. We need to put more effort into measuring these other benefits.

 Q: In terms of monitoring blue carbon projects, what are the most significant technical or logistical challenges that need to be addressed? 

A: Cost is often the main barrier. The methods and technologies exist but can be expensive. This can be a barrier in two ways. One is that it makes projects so expensive that revenue from sale of credits does not offset the cost of doing the project. Another is that poorer nations and communities can be left behind. Ensuring that we have low-cost methods that work in developing countries is important for international equity.

Q: As we look to the future, do you think blue carbon credits will become as established and integrated into global carbon markets as terrestrial carbon credits? 

A:Yes, they already are. The scale is not as great as it is for forests, but blue carbon credits from the protection and restoration of mangroves and sea grasses are being generated in multiple countries.

 Q: How do you envision the evolution of blue carbon and biodiversity financing over the next decade, especially in terms of its role in achieving international climate targets like those in the Paris Agreement?” 

A:My aspiration is that we continue to break down the barriers that prevent protection and restoration of blue carbon ecosystems. This can include finance, and developing low-cost technologies and building capacity is key. Just as important will be adoption of high integrity principles and development of an enabling regulatory environment. Some things governments and communities can already do, they just need a little help or a clearer mandate. The emergence of broader nature and biodiversity markets also has potential to reward good ecosystem stewards who are currently locked out of carbon markets.

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