Electricity reform: The battle between control and competitiveness

By Dhananath Fernando

Originally appeared on the Morning

The amendments to the Sri Lanka Electricity Act of 2024 have once again stirred public discourse, as key international development partners – namely the Asian Development Bank (ADB), World Bank (WB), and Japan International Cooperation Agency (JICA) – have raised serious concerns about their implications.

Sri Lanka’s power sector reform journey, particularly the unbundling of the Ceylon Electricity Board (CEB), has been a prolonged and often politically fraught conversation. The recent economic crisis made one thing clear: inefficiencies and structural rigidities in the energy sector are no longer sustainable. 

In response, a new bill was passed, aiming to restructure the sector by unbundling the CEB into generation, transmission, and distribution entities. This was intended to facilitate grid upgrades, improve renewable energy absorption, and lower costs while improving service delivery.

Yet, the devil – as always – is in the details. The accompanying table contains a summary of the four key concerns raised by development partners, along with the corresponding responses from the Director General of the Power Sector Reforms Secretariat.

On the surface, the responses summarised in the table seem to address concerns. But policy isn’t judged by intentions; it is judged by results. And to get results, legislation must be clear, enforceable, and resistant to misuse by future governments. Unfortunately, the Electricity Act still leaves many grey areas, which could cause more problems than it solves.

Take permanent Government ownership, for instance. The Government says it will only hold on to generation and distribution companies for now, but there is no clear legal path or timeline for opening up future entities to investment. Without clear guarantees, this could become a case of kicking the can down the road, keeping control within State hands while blocking much-needed capital and innovation. 

Then there is the issue concerning a National Transmission Network Service Provider (NTNSP). Even if the NTNSP won’t directly handle power generation, it will still own companies that do. This undermines the principle of unbundling, which is all about separating who generates power from who transmits it, so that the playing field is fair for everyone. You cannot say you are de-merging the system while letting one player wear two hats.

On the question relating to the Lanka Electricity Company (LECO), the response says only the CEB’s 55% stake is involved and that LECO will remain independent. But the act gives enough flexibility for future decisions that could quietly erode LECO’s autonomy. Without explicit protections written into law, these assurances are only as strong as the next government’s intentions.

Finally, on tariffs: while the regulator is supposed to have the final say, the phrase “in consultation with the Ministry of Finance” in legal terms can mean joint decision-making. That could politicise price-setting, delay reforms, and discourage private investment. What investors want is clarity; ambiguity is their biggest fear.

In public policy, it is not the intent but the outcome that matters.

At the heart of all four concerns lies a common thread – control over market dynamics and decision-making. Two underlying fears appear to drive the insistence on Government ownership: the fear of losing control over a strategic sector and the pressure from trade unions worried about losing the privileges that come from monopoly protection. These are not unfounded concerns, but they are not sufficient justifications to resist reform.

Strategic interest is best preserved not through outright ownership but through strong regulation. Maintaining Government ownership over generation and distribution does not guarantee better outcomes for consumers. Instead, a robust, independent regulator and a competitive market architecture are more likely to deliver efficiency, lower costs, and innovation.

Moreover, modernising our grid is critical not just for absorbing renewable energy but also for positioning Sri Lanka to eventually export electricity, especially through grid connectivity with India – a long-term but strategic goal.

Another key principle is that legislation should be designed not just for today’s leaders but to guard against potential misuse by future actors with less noble intentions. A vague clause, even with the best current leadership, can become a tool for rent-seeking or manipulation down the line. 

The ambiguity around the Ministry of Finance’s involvement in tariff setting, for instance, opens the door for potential political interference, even if unintentional.

The political economy of reform is such that ambiguity breeds resistance, from investors and insiders alike. Leaving grey areas in legislation invites both capital flight and capture by vested interests.

Ultimately, the Electricity Act must be evaluated on its ability to foster competition that is regulated, not ownership that is politicised. The objective should be clear: maximise consumer benefit in terms of price, reliability, and national security. In chasing control, we risk losing all three. 

Concerns and responses 

Summary of concerns by WB, ADB, and JICA

Response by Director General of the Power Sector Reforms Secretariat

1. Permanent Government ownership

Legislating 100% permanent State ownership for key electricity entities limits flexibility, deters private investment, and increases the long-term burden on the Government.

The Government of Sri Lanka will retain 100% permanent ownership only in the generation and distribution companies created through the preliminary transfer. Further unbundled entities, except for hydropower, will not be subjected to this restriction.

2. Concerns with National Transmission Network Service Provider (NTNSP) structure

Including LTL Holdings and Sri Lanka Energies under the NTNSP undermines unbundling, risks conflicts of interest, and reduces transparency.

The CEB’s stakes in these entities are classified as assets to be transferred to the NTNSP. The NTNSP will be limited to transmission functions. No re-bundling will occur, and power purchase agreements will be managed competitively by the National System Operator (NSO).

3. Distribution company risks

Merging LECO into the new distribution company disregards operational and governance structures, risking reversal of previous efficiency gains.

Only the CEB’s 55% stake in LECO will be affected. LECO will remain a separate legal entity, with the freedom to pursue private investment. There will be no full absorption.

4. Tariff-setting ambiguity

Changing “after consultation” to “in consultation” with the Ministry of Finance in tariff-setting risks undermining regulatory independence.

Although tariffs are now to be set “in consultation with the Ministry of Finance,” the regulator retains final authority, in accordance with national tariff policy.

Borrowing from Peter to pay Paul

Originally appeared on The Morning

By Dhananath Fernando

There’s a childhood memory engraved in my mind, of an incident with a fellow schoolmate concerning an act of borrowing. Back then, we borrowed money from each other constantly to eat sweets and junk food and buy video game gadgets. A particular friend of mine had the habit of borrowing a little money every week and settling the same again after a week’s time right on schedule. After a few weeks, I realised he borrowed the same amount of money from another friend as well. 

Like a well-planned roster, he proceeds to settle his debt with the other friend in a week’s time. One day my frequently borrowing friend did not settle my money as he promised. When I confronted him on the matter, he plainly stated that he settled the amount owed to me with the money he borrowed from my other friend and vice versa. At this one instance, the other friend had refused to lend money to my frequently borrowing friend so he was unable to settle with me. 

But what was particularly amusing was what he said after. “What I have been borrowing and settling for the past few weeks is money from the two of you to each other. So to resolve the matter, the two of you must settle with each other because it’s your money. Not mine.” 

Sri Lanka’s debt servicing is a much more complex version of what my classmate did; we settle our creditors by borrowing from someone else. Most sovereign countries do the same. However, this can only be done when someone agrees to give us money. Similar to the incident with my friend, the moment people refuse to lend us money, the cycle starts collapsing. That is exactly what happened to Sri Lanka. As a result, the country has lost its credit rating by international rating agencies and has thereby lost market access. 

The current strategy we follow is requesting lifelines from our bi-lateral partners as a form of assistance. As a result, in just five days, India threw in about $ 1.4 billion worth of credit lines and swaps to secure our fuel, medicine, essential supplies, and debt repayments. 

Initially, China provided us with a swap of 10 billion Yuan as a back-up, which the Central Bank absorbed as reserves according to their data. 

At the same time with some of the bi-lateral partners, our relationship has not been professional. We cancelled the LRT project with Japan, which is our main bilateral creditor as well as the main funder for one of our main multilateral partners, the Asian Development Bank (ADB). To make matters worse, we keep the trade channels such as vehicles and spare parts closed, which is precisely where the bilateral relationships can be strengthened. 

Our mismanagement of bilateral relations is reflected, even with China. Recent events, such as our shortsighted handling of diplomatic relations over the fertiliser issue, with China blacklisting a state bank for not honouring payments, illustrates this issue. 

Economically and geopolitically, we have lost market access for borrowing on one hand, and on the other, we have somewhat tarnished the relationship with our friends at a time when we need their assistance the most. So far, we have been very lucky to still have their continuous support regardless of the setbacks even though the fault is on our end entirely. As a recommendation, the Government should not take the silence of some bilateral partners lightly, but work double-time to restore trust and understanding in business and trade. 

The current strategy of paying our International Sovereign Bonds through bilateral swaps and depending on credit lines for essentials will eventually come at a geopolitical expense. We become more vulnerable with our past track record of working with our bilateral partners. 

In this context, the Central Bank increased policy rates by 50 basis points, a policy move in the right direction. However, this comes – unfortunately – too late to stop the inflationary pressure constantly building, probably due to the faulty use of Modern Monetary Theory, which we have been following for some time now. The policy rate revisions will encourage people to save more money instead of spending more. This will somewhat ease the pressure, but at the same time slow the economy down. But we can’t afford to accelerate the economy with a historic balance of payment crisis which was already exacerbated by a price control on US Dollars (USD) in an attempt to encourage imports and discourage exports. 

Surprisingly, policymakers have not taken any reforms to overcome the situation, believing that debt servicing through borrowed money will solve the problem. Very high hopes have been kept on tourism but the same thing that happened to remittances will happen to tourism when we try to keep the exchange rate very low. We encourage people to keep the USD in grey markets so people will become further reluctant to sell their hard-earned USD to the Central Bank. 

At the same time, we need to understand tourism also increases the consumption of the economy where, with USD inflows, there will be a fair share of USD outflows concurrently. Thus, keeping all our eggs in the basket of tourism would not be advisable at all. If policymakers recall, at the beginning of the pandemic, remittances were at a record high. With mounting debt, our policymakers replied that our solutions remained in our remittances, which today are in decline due to our own policy failures. In this context, there are certain areas for restructuring that policymakers have to consider if they were to come out of the crisis: 

1. Restructuring of our social security net. A market pricing-based digital cash transfer system with better targeting than Samurdhi is recommended to provide poor people the opportunity to keep their noses above the water to navigate through the economic reform period

2. Restructuring and Reforms on the State sector and State-owned enterprises are a must. Listing the debt of State-owned enterprises, privatisations, consolidations and outright sale of some of the assets owned by State-owned enterprises is required for the private sector, including land. Government care has to be limited through a reasonable voluntary retirement scheme

3. Restructuring and Reforming in our Central Bank .The current tools of excessive interventions by the Central Bank on interest rates, exchange rates and every part of monetary policy has to be refined

4. Restructuring and reforming our tax system and tariff system is a must. Currently, our income and corporate tax systems are too complicated and it has to be simplified if policy makers are interested in increasing revenue. The complicated tariff structure has to be simplified with three tariff bands. Bringing down tariffs will also help the Government increase the revenue and boost trade

5. Restructuring and reforming our production structures for it to be aligned with global production and supply chains is vital to increase export revenue. At the same time, a deregulation drive has to be initiated to ensure conducive business environment for locals and foreigners

6. If our debt is unsustainable, we have to consider a restructuring of debt, but with the above-mentioned reforms. Attempting to do a debt restructuring without a solid commitment to reform will worsen the problem and debt restructuring could become a frequent event causing us to lose our credibility and market access if we fail to do the necessary reforms

All these ideas are not new and not a first mention in this column. These have been repeatedly spoken of by countless economic experts. It is simply that the call to action rate is very low. Policymakers whose job is to change policies and get things done. Not to behave like my classmate – paying debts with borrowed money, wiping their hands clean, and shifting the responsibility elsewhere at the last minute.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Dear sir, optimism is not a strategy

Originally appeared on The Morning

By Dhananath Fernando

The Govt. must start pulling the economy in one direction

The former Chief Pilot of Air Lanka and former Boeing 747 instructor Captain Elmo Jayawardena is someone I know well. He has had a long career as a pilot at Singapore Airlines. Out of curiosity I often question him on how flight operations work. He describes vividly the level of detail with which pilots go through pre-flight checklists before they sit in the cockpit; fuel levels, weather patterns, emergency landing at each phase of the journey, and so many technical details get evaluated by them.

He always talks about a “plan B”. As pilots always operate on the basis of something going wrong and having a back-up plan for it, I feel they are very pessimistic – my judgemental thoughts on their level of planning and carefulness. However, one day I asked Captain Elmo: “Can’t you become an optimistic pilot, thinking that everything will be fine? There are so many aircrafts taking off and landing safely and very rarely do we hear about plane crashes. So, do you have to really go into that level of planning?” He answered: “Optimism is not being ignorant or denying the possibility of a potential risk scenario. Optimism must be grounded in reality that all events and decisions have a risk factor.” I then realised that one can be genuinely more optimistic if you have a plan to face the worst-case scenario.

Looking back at Sri Lanka’s economy provides some important lessons on how we have dealt with optimism. We as a people have always lived in an optimistic state. After Independence, we thought it was all over. Then following the end of the youth insurrections and  30-year long civil war, we looked forward with optimism. This period was followed by a window of economic reforms, with the end of the war adding to our economy.

However, we missed that grand opportunity of reform as we only focused on short-term development.  We failed to put our economic fundamentals right! As this column has highlighted previously, since 2015 up to date we have faced five major shocks to our economy – the Central Bank bond fiasco, drought in 2017-2018, a constitutional coup in 2018, Easter attacks in 2019, and Covid-19 in 2020. These events have decided the fate of our current economy and pushed it to where it is today. However, some of these events are due to misfortune and the others are examples of mismanagement. 

In this context, the Government still looks very optimistic about the growth numbers for next year and provides messages of absolute confidence that Sri Lanka can overcome the current situation through medium and long-term growth. In order to walk the talk, the Government did not reverse any tax concessions announced in December 2019, even with two rating downgrades by Moody’s and Fitch. Likewise, the Government has provided an optimistic message to all our creditors, assuring them that we will pay all our debts, taking into account our track record of servicing the debt without any default (with rescue efforts from the IMF [International Monetary Fund], World Bank, and the ADB [Asian Development Bank]).

All the positivity and clear, focused messaging by the Government is commendable. However, the Government should not divert from the real situation on the ground in this Covid-19 world, where external support may not be easily available as in the past. The Government must understand the impact of this on our short, medium, and long-term credibility.  A recent Citi Bank report for their investors highlighted the same concerns again. What is missing in this puzzle for many investors is a credible action plan. Having a credible action plan is similar to the planning that a responsible pilot carries out. It illustrates accountability for creating a safe and pleasant flying experience. This helps build trust and confidence about the pilot among passengers and also provides them the peace of mind that they will reach the destination safely.

This is done by having a plan on how to achieve the goal and what needs to be done in case of an emergency.  When we provide a positive message without a strategy or action plan to back these arguments, then this affects our credibility and our partners may not take us seriously. Even if we have a strategy and if we fail to disclose it with objectivity, then this raises concerns about our sincerity and commitment to overcoming the looming economic crisis.

The Government’s growth is expected through Foreign Direct Investments (FDIs) and exports according to the Budget 2021. Both these inflow sources are very sentiment-driven and an optimistic psychology without an action plan may not build the image we want to project – an image that attracts top investors, companies, and gives the edge to reach export markets. Tourism, which we expect to open in the first quarter of 2021, is even more sentiment-driven than the above two. Over the years, none of the necessary and serious reforms have taken place to signal the markets to attract more investments or encourage exports to take off.  We should explain our logic of how Sri Lanka is going to pay on average $ 4 billion every year for the next five years. It must be noted that we have $ 5 billion in reserves at hand and with two credit rating downgrades, interest rates will increase on further borrowing. If we can explain the logic of how we are going to manage the numbers with a credible plan, then the key stakeholders can work towards materialising the plan and achieving results.

On the other hand, we should not forget that our strategies are comparative to the strategies of the rest of the world. The rest of the world competes with us for the same export markets, for the same investors, with their own advantages and disadvantages. So reaching new export markets and attracting new investment is a competitive process which we can’t ignore. It is credibility and reasoning that matters when attracting these inflows.  Looking at the past, we cannot ignore the possibility of new shocks that might occur during our recovery period. So we have to be prepared!  

As his Excellency the President mentioned in his meeting with the Central Bank a few months ago, we can’t let the health crisis lead to an economic crisis. Likewise, we cannot let the economic crisis lead to a social crisis. Our optimism cannot lead to denial or a blindness to the ground reality – that there is a significant challenge right at our doorstep. I am all for optimism and positive thinking, but as my mentor, Captain Jayawardena said: “We can be genuinely optimistic only if we have a plan to manage the worst-case scenario.”

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.