In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.
Originally appeared on The Morning
By Dilshani N. Ranawaka
Ceylon Electricity Board (CEB), the state-owned enterprise that tries to power the nation has been making news headlines consistently over the past two weeks; on the topics of power failure, clashes between related entities, losses, and corruption.
The CEB’s mission and vision includes phrases like “maintaining an efficient, coordinated, and economical system of electricity supply” and “core values; quality, service to the nation, efficiency, and effectiveness”. Analysing news headlines related to the CEB over the past two weeks, the long list of issues plaguing electricity generation in the country makes it clear that they are not fulfilling their mandate.
Issue one – losses
During a period of 10 years from 2006-2017, the CEB accumulated a total loss of Rs. 186 billion, in addition to the loss of Rs. 29 billion incurred in the year 2018. If the CEB was privately run, it would have been bankrupt by now, and if the firm’s sole intention was to survive in the market, major reforms would have been put in place.
However, when the State runs vital services;
The government is required to bail out the organisation because they can’t stop its operations
The government has no incentive to improve their performance. Supply shortages and accumulated mountain of losses along with reported corruption cases against the CEB should be a cause for concern
The rationale is simple. If you invested a wealth of money on a particular service, wouldn’t you be concerned about profits and losses? Wouldn’t you take actions if you felt like there’s an increase in demand or a shortage of supply? Wouldn’t you take precautionary actions to deter or prevent corruption? Why would you be so concerned about your investment? It is because you have a sense of ownership and a special interest to succeed because it’s your hard-earned money.
Decision makers at the CEB do not feel a similar sense of ownership, and thus, do not prioritise cost reduction and profitability – after all, it is someone else’s (taxpayer’s) money and not theirs.
When a resource is not used in its maximum capacity, inefficiencies occur. When inefficiencies exist, more resources are used in order to produce one unit of electricity. Therefore, even though electricity is subsidised for public gain;
Electricity is still produced at a cost which is borne by the CEB. Since the CEB is the State and the State is still run by the people, taxpayers indirectly have to bear the cost of production. Investments in the CEB are made through taxpayers. The management is not properly incentivised to improve their performance because the CEB is heavily reliant on the government. If the CEB performs poorly, the security or bailing out by the government would always give them an ultimate form of protection, further enhancing weakened institutional gaps within the CEB. Recent reports focus on a dispute between the CEB and Ceylon Petroleum Corporation (CPC). According to these reports, the CPC had stopped supplying fuel for the CEB as they had exceeded the credit limit of Rs. 80 million and delayed payments.
After days of discussions, the CPC decided to increase the credit limit to Rs. 100 million, stating their difficult position as public banks are reluctant to provide credit to CPC. In this instance, the inefficiencies of one SOE affect the functioning of another linked SOE.
Issue two – clashes between energy sector-based entities
Since inception, the Public Utilities Commission of Sri Lanka (PUCSL) and the CEB have had a disputatious relationship with each other. There have been numerous cases filed against the CEB and vice-versa throughout the past three years. While PUCSL maintaining an independent role is admirable, these disputes have not been addressed. A series of coordinated meetings where PUCSL could inform the CEB of the complaints they receive could push home the point that efficiency needs to improve and would be a step in the right direction.
On the other hand, the CEB’s response to CPC cutting down their fuel supply was to not provide electricity to CPC. CPC being clear that they had exceeded their credit limit, shouldn’t it be CEB’s responsibility to initiate discussions with CPC?
Issue three – corruption
The autonomy given to the CEB without a doubt encourages corruption. Within the past two weeks, two incidents of corruption by the CEB have been reported in the news. The first was the purchase of malfunctioning turbines. Turbines are a vital component of producing electricity and their quality should be of the best standard. Are the responsible parties of the CEB incompetent? Or is it simply because they gain out of this purchase?
The second accusation against the engineers was that they have been purchasing electricity at higher rates. When the CEB purchases at higher rates, the party involved with the transaction gains a commission for helping out with the business. The higher the margin between the buying and selling rate, the higher these parties gain. Being aware that the national grid is short of supply and that the CEB is knee deep in losses, is it ethical for them to make such decisions? This accusation made by PUCSL is still to be defended by the CEB.
What is even more important is to question if this was the first time such corruption took place over 50 years of operating. Why is the Government not taking action on this?
The long-term solution to these problems would require privatisation, with multiple benefits coming in by opening up the energy market. Presently, the energy market is dominated by the CEB. Opening the market for private competitors under the supervision of the Ministry would mean the following increase in competition motivates the CEB to reduce the costs of production in order to function smoothly and compete with similar suppliers; a solution for the current electricity shortage. Public debt burden will reduce, directing funds towards other productive projects and giving the State fewer responsibilities.
Why we won’t see this happening anytime soon
Presently, reports indicate that policies discourage private energy investors from entering the industry. The prolonged policy to increase the capacity of the grid is stagnant due to this discouraging environment within the industry.
Reducing the number of subsidiaries and sub-subsidiaries governed under the CEB: There are 14 subsidiaries and sub-subsidiaries under CEB. The CEB either could sell off its shares or make these subsidiaries operate independently from the CEB, lessening operational costs and improving accountability.
Investiture responsible managers to the governing board: The management should be accountable for an entity’s government. A strengthened management would reduce political interference and put a renewed focus on efficiency, improving performance, and reducing corruption.
Work together with PUCSL in improving their services: The objective of the PUCSL is to ensure that the public gets the best service out of these bodies. If these institutions do not work together to improve their services, the objective of establishing these two bodies would be completely in vain.
Sri Lanka is in the process of transitioning towards a more service-oriented economy. The role of energy and power should be a key component in making this transition smoother. CEB, even after being in the industry for 50 years is still not functioning smoothly as the consumers would have hoped. If the State’s role is to aid the public, would it be a hard ask to replicate the success of Sri Lanka Telecom with CEB too?