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.

Trump’s tariffs hurt us all, including SL

By Dhananath Fernando

Originally appeared on the Morning

US President Donald Trump’s administration’s wave of tariffs may have been framed as a protectionist strategy to ‘make America great again,’ but its global ripple effects are undeniable, and for countries like Sri Lanka, the consequences are quietly but steadily piling up.

To truly grasp the impact of US tariffs, we must first understand who bears the immediate burden – American consumers. When prices rise due to tariffs, it is not foreign producers footing the bill – it is American families. And when US consumers, who account for roughly 20-25% of global consumption, tighten their belts, the world feels it. Sri Lanka is no exception.

The triple blow of tariffs

At their core, tariffs are a triple blow to consumers:

1. Higher prices: Consumers pay more for goods, many of which cannot be easily substituted locally.

2. Artificial subsidies: Local industries that cannot compete globally get propped up, with the consumer footing the bill.

3. Corruption and rent-seeking: Tariffs empower lobbyists and politically connected businesses, leading to corruption, cronyism, and distortions in policy-making.

This is not unique to America; the theory holds true anywhere, including right here in Sri Lanka.

When US consumers are forced to spend more for less, their overall consumption drops. And because Sri Lanka’s key exports – apparel, rubber, food, and gems – rely heavily on US demand, this can shrink our export revenue and threaten local jobs.

Flawed economics, real consequences

The US Trade Representative’s rationale for reciprocal tariffs rests on a flawed understanding of trade balances. They have calculated tariffs based on the trade deficit with individual countries, assuming this reflects both tariff and non-tariff barriers. It doesn’t.

Moreover, their economic modelling assumes a price elasticity of four and an import-tariff elasticity of 0.25. Multiplied together, these yield a neutral effect, essentially arguing that price and demand perfectly balance out. But that is theoretical fantasy. In reality, trade relationships are nuanced and complex.

Sri Lanka made a similar mistake in past free trade talks with India and Singapore, obsessing over trade deficits rather than economic opportunity. Now, we find ourselves at the receiving end of the same misguided thinking.

Tariffs don’t build industries 

Some argue tariffs create jobs and strengthen domestic industries. But Sri Lanka’s own experience disproves that. For decades, we have imposed tariffs of over 300% on vehicles. Has that turned us into a car manufacturing hub like Japan or South Korea? Not even close.

In fact, the sectors most protected in Sri Lanka – construction materials, footwear, and others – remain stagnant, rent-seeking, and politically captured. Consumers pay exorbitant prices, innovation is stifled, and exports are virtually nonexistent in these areas.

What should Sri Lanka do?

Given our size and economic position, retaliation is not an option. But this global shake-up gives us a golden opportunity for reform. 

Here is what we can do:

1. Unilaterally clean up our tariff system: Eliminate para-tariffs like Ports and Airport Development Levy (PAL) and Value-Added Tax (VAT) on imports. Not because the US is forcing our hand, but because it is the right move for our own competitiveness.

2. Engage strategically with the US: While we may not be a major trading partner to the US, our strategic location in the Indo-Pacific could be a valuable card at the negotiation table. A peaceful, open Indian Ocean is in everyone’s interest.

3. Leverage regional alliances: India has used tariff adjustments as a negotiation tool, and Sri Lanka could align with Indian supply chains to access broader markets. Since much of what we export – like high-value apparel – cannot easily shift to East Asia, regional strategies are critical.

4. Don’t import for the sake of it: Matching trade deficits by simply importing more from the US will not work. We cannot absorb their big-ticket exports – aircraft, weapons, or energy – and doing so irrationally would only hurt us further.

5. Join more regional trade agreements: But most importantly, let’s not wait for others. By unilaterally reforming our trade policies, we can unlock new markets and boost exports, while reducing consumer costs and curbing corruption.

Reform, not retaliation

Tariffs are not just about economics; they are about values. When governments shield inefficient industries and empower rent-seekers, it is the people who pay the price. Let us use this moment not to imitate protectionism, but to chart our own path – one that opens doors, not closes them.

The fundamentals of a healthy economy begin with open, fair, and efficient markets. Sri Lanka has the chance to lead by example.