The economics behind the fuel crisis

Originally appeared on The Morning.

By Dhananath Fernando

I recently overheard a conversation while taking public transport. The bus I was commuting in was moving at a snail’s pace across Dehiwala as people had blocked the road to show their displeasure over fuel shortages. The fuel queue was long, spanning over a few kilometres, consisting of mostly three-wheelers. The conversation started when a lady seated at the back lost her patience as some three-wheeler drivers tried to block the road. 

“Three-wheelers are a curse on our country,” she said. “Look how long the queue is and how undisciplined these tuk drivers are. They consume a lot of fuel and they just sit and waste their time browsing the internet on their phones while they are in the queue. All these drivers are a part of our labour force and they are part of the problem behind this fuel crisis. We should ban three-wheelers and develop public transport. The Sri Lanka Transport Board should field as many buses as possible. Why can’t they employ more trains at this time?” She had initiated the conversation with a gentleman seated next to her, who was also highlighting some solutions. 

Her opinion would be mirrored by many Sri Lankans if they were asked about the reasons behind the fuel crisis and economic crisis. While we all understand that it is the foreign exchange or USD shortage which led to this fuel crisis, the productive use of our limited fuel stocks has been in discussion for many months. People are now worried that once the latest fuel shipment is exhausted, Sri Lanka will completely run out of fuel as we are scraping the bottom of the barrel of the Indian credit line. 

We all have to admit that fuel has become an extremely scarce resource given the shortage of USD. Another side to the problem is that fuel importation and distribution is mainly done by the Ceylon Petroleum Corporation (CPC) and Lanka IOC (LIOC). Both these companies do not generate USD revenue. 

If we allow anyone to import fuel, then the exporters who have US Dollars will import fuel mainly for their usage for export output. The garment and rubber industries will import fuel on their own with their own US Dollars to run their generators and plants and pay the tax. 

It is far more convenient, efficient, and productive for them to depend on their own supply chains than depend on the inefficient CPC. When there are industries that can afford fuel imports at their own cost, there will be more fuel for common people through CPC and LIOC with the little forex and credit lines they secure. 

Daniel Alponsus has explained this in his recent blog in detail (1), where he further suggested removing price controls on fuel and allowing an open market account for fuel imports so the informal forex will automatically move towards essentials such as fuel while remittances will start flowing.

Before we come to the conclusion that three-wheelers are the problem (as per the conversation I overheard on my journey), we have to first ask why there are so many three-wheelers on the roads. The simple fact of the matter is that they are very efficient – they are lightweight, their fuel economy is about 30 km/litre, and they can transport one to three passengers per trip. By comparison, the fuel efficiency of a personal vehicle – depending on the weight and engine displacement – would on average be approximately one-third of the fuel efficiency of a three-wheeler. 

Secondly, three-wheelers are the main form of last-mile transport. They provide flexibility in labour markets, contributing to their popularity. The final and most significant reason for the large number of three-wheelers is the lack of sufficient public transport – both in terms of quantity and quality. If there was an option for anyone to become a service provider of public transport, most three-wheeler drivers would have become public transport drivers. 

At present, just because you have a bus doesn’t mean that you can field it on the road due to the route permit system. In many cases, the selling price of a route permit is a few times higher than the value of the bus even after a massive excise duty, sometimes above 100%, being imposed on the vehicle. 

Our policies have therefore discouraged many entrepreneurs from entering the market for public transport. In addition, we have strict price controls on bus fares, which limit the ability of service providers to differentiate their services at different price levels. 

For example, a young executive may be willing to leave his vehicle at home and shift to public transport if there is a transport service that provides internet service and a breakfast package. The executive can work while commuting and he can save on his breakfast preparation time at home. However, with the current controlled prices and route permit system, such niches with higher quality of service (and higher prices) cannot be fulfilled. 

So the main reason for the higher number of three-wheelers and more fuel combinations is the absence of market forces in the public transportation sector. The fuel crisis has been exacerbated by bad public policy in relation to public transport. This has compelled us to use 60% of our fuel imports, which is the highest single commodity type import in our import basket. 

The only encouragement provided for public transport was the bus lane priority system – now even that has unfortunately been abandoned. If we want to incentivise the buses for their fuel, another option is to subsidise their fuel based on mileage. This means the bus operators would buy fuel at the same price as a normal customer at the pump but they will obtain a subsidy based on mileage to avoid any leakages (i.e. resale of fuel on the secondary market at a premium) and provide incentive for drivers and consumers. 

Poor data availability and the lack of information systems acts as a bottleneck for such initiatives. However, if private mobile based services like PickMe or Uber can track mileage and location, there cannot be a reason why the same mechanism cannot be implemented for public transport.  

In the midst of rising fuel prices, Germany reduced public transport fares to encourage more people to commute through public transport. This is so that the fuel consumption of using individual vehicles would be lower. Unfortunately, Sri Lanka did otherwise. Our policymakers did not understand the economics and optics of the problem. Until we understand the dynamics of the situation, we will all simply listen to and believe conversations about three-wheelers being the issue without really understanding the fundamental problem.  

References:

1. https://danielalphonsus.substack.com/p/solving-sri-lankas-fuel-crisis?s=w

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.

Don’t throw the baby out with the bathwater

Originally appeared on The Morning.

By Dhananath Fernando

While Sri Lankans have learned to accommodate daily blackouts by now, Sri Lanka’s power generation, or rather the lack thereof, has made headlines again. Minister of Power and Energy Kanchana Wijesekera’s amendments to the Electricity Act and trade union actions have created quite the chaos.

Sri Lanka’s power generation has always been political capital for politicians. During the Yahapalana Government, then President Maithripala Sirisena said he wouldn’t join the Cabinet until the Public Utilities Commission of Sri Lanka (PUCSL) and Ceylon Electricity Board (CEB) came to some resolution (1). The same administration saw CEB officials vehemently organising ‘bodhi poojas’ for the rain gods to avoid the horrors of extended power cuts. Recently, the CEB Chairman followed suit, stating: “When God gives rain and the Ceylon Petroleum Corporation (CPC) gives fuel, the CEB can provide electricity”(2).

In this context, the new Power and Energy Minister plans to amend the Electricity Act. The CEB Engineers’ Union has declared public resistance. The CEB enjoys a monopoly in transmission and maintenance of the grid and a greater control on power generation development and distribution. Therefore, as a trade union it has very high influence. This makes energy sector reforms very complicated. Achieving consensus between stakeholders is next to impossible. Given this monopoly and profit-making ability, reforms have taken a backseat. In this climate, the willingness of the Power and Energy Minister to prioritise reforms is commendable.

The Minister made a speech in Parliament highlighting the delays of renewable energy. In response, the Government suggested moving away from competitive bidding for renewable energy projects. While there is some degree of truth to delays occurring during the process of competitive bidding, the sustainable solution is not to completely do away with it. Under competitive bidding, the cost per unit of solar energy can drop drastically. Getting rid of competitive bidding would mean welcoming unsolicited renewable energy projects with much higher cost per unit. This cost will ultimately have to be borne by industries and consumers. In any trade, complete absence of competition means more rent seeking, inefficiencies, and corruption. 

A major reason for the delay of solar energy projects is the unavailability of land; 82% of Sri Lanka’s land is owned by the Government. Therefore, finding land for projects has become very difficult. The Government must prioritise clearing land for private investments. This applies to businesses across the board.

Secondly, making the policy and regulatory environment conducive to unsolicited proposals may not benefit the Government. This is because the current economic conditions are such that we do not have dollars to import material needed for renewable energy projects. Further, the cost of finance is also significantly high as our interest rates have skyrocketed. Without foreign exchange and high capital cost for any investor, development of renewable energy projects will take a backseat. Ultimately we will end up abolishing a competitive system with further delays and corruption.

The controversial wind power plants in Mannar should also be under the competitive bidding process. Failing this, Sri Lanka will not be able to reach market rates and will probably have to sell our energy generation for less than the market rate.

The solution is the unbundling of power generation, development, and distribution. Presently, whoever generates power has to contribute to the CEB grid. They have a monopoly in generation and development. Unbundling will divide these three segments and open some of it to the private sector. This will give people the choice to switch between any service provider based on the quality and reliability of the supply. Completely removing the competitive bidding process, without unbundling, will bring a double whammy on the cost. The prices of renewable energy will increase, while the CEB will continue to control the system through the grid. Thereby the Power and Energy Minister’s good intention to reform the energy sector may end up leading to a more negative condition with unintended consequences.

The Minister’s suggestion to connect the grid with India through a HVDC (High Voltage DC) cable is a sensible decision. One of the main challenges and restrictions for the expansion of renewable energy are demand and supply. Lack of management and access to a larger grid to sell and buy surplus or deficit of power too is an impediment. Connecting the Sri Lankan grid with India creates opportunities to overcome this issue. However, energy security precautions will have to be taken.

The suggestion of connecting the power grids of India and Sri Lanka was also made by Prof. Rohan Samarajiva in a report compiled under the chairmanship of former Governor of the Central Bank Dr. Indrajit Coomaraswamy, which was handed over to the President.

If Sri Lanka is to overcome the current energy crisis, reforms in the sector through unbundling and competitive bidding are necessary. Let’s be hopeful that our young Minister can make this crisis an opportunity to implement necessary reforms. 

References

(1) https://www.timesonline.lk/news/president-wont-attend-cabinet-meetings-until-ceb-pucsl-dispute-is-resolved/18-1082024

(2) https://www.newsfirst.lk/2022/03/31/when-god-gives-rain-and-cpc-gives-fuel-ceb-can-give-power-ceb-chairman/

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.