Who pays God’s electricity bill?

Originally appeared on The Morning.

By Dhananath Fernando

Over the years, I have volunteered at a humanitarian organisation named CandleAid Lanka to help the poor. The organisation has a programme called ‘Gift a Meal,’ where we provide meals to selected vulnerable households. When these people receive meals or dry rations, they thank the organisation profusely. I have noticed that most families also thank whichever god they believe in, because poor people think it is their god who is giving them a meal through CandleAid. 

I shared this observation later during a dinner table conversation with CandleAid’s Founder, Captain Elmo Jayawardena, who, as usual, cracked a joke regarding my observation. He said: “God takes very good care of people who support CandleAid, because God is rational. God ultimately gets the credit for all the hard work we do, so he must be thinking that he will lose the people’s support on two fronts if he harms such people. Firstly, he will lose the credit he gets through CandleAid’s work, and secondly, people will lose trust in God, because if something happens to people who donate to these charities, others will wonder why generous people are not being taken care of by God. So any rational God would simply do everything to protect us.”

Captain Jayawardena of course did not mean any particular god or religion, but was simply sharing a light moment at a private dinner. 

Lower power tariffs for religious institutions 

There was a time when the high powers of the Ceylon Electricity Board requested the blessings of a rain god for uninterrupted power supply during the Yahapalana regime. Now, religious institutions have requested a lower tariff rate compared to the normal rate.

Let’s face the truth. Even if we provide low tariffs for religious institutions or ask them to pay high tariffs, it is the common people who will pay. If we provide a tariff concession, common people and businesses have to pay it as taxpayers. Someone has to bear the cost of electricity generation, transmission, and distribution. If we cross-subsidise religious institutions, it is ultimately the taxpayers who have to pay. If we ask religious institutions to pay higher tariff rates, these same common people have to pay, as devotees of the god they believe in. 

However, there is a significant difference in behaviour and impact of usage, although the end payer is the same. 

If taxpayers are asked to pay the subsidy for religious institutions, religious institutions have no motivation to reduce their usage, because the buying price is far less than the market price. Therefore, there is no motivation to save electricity. 

At the same time, the difference in treatment of one set of customers will create market distortions. It will also set a bad example and many other customer categories will make the same request. 

Moreover, even those who don’t use electricity at the religious institution have to indirectly pay for it through taxes, instead of spending the money on something productive. This will incentivise the religious institutions to continue using electricity without moving to sustainable energy sources. Even if the particular line ministry pays the electricity bill, it is ultimately the taxpayer who has to foot the bill. 

If the higher electricity tariff is borne by the religious institutions, even then the same taxpayers have to pay the bill, as devotees of the institution. But in this case, devotees who use electricity at the institution will be the ones to bear the cost, so they have a motivation to reduce their consumption. This will also incentivise them to look for alternative energy sources. 

Market reform for better options

Considering the political dynamics surrounding the tariff hike, it appears that once again electricity tariffs are becoming a political weapon as usual. Most likely this will block some electricity sector reforms. 

If there was a market system, there could have been a concessionary rate for religious institutions. For instance, if we had a few companies that undertook electricity generation and distribution, one of these companies may have offered an option for religious institutions to receive electricity at a concessionary rate as charity. 

For example, supermarket chains run various charity projects geared towards sustainability through their outlets. Telco service providers offer different services to donate money on a range of issues at a corporate level. 

Therefore, I believe that religious institutions should request for market reforms rather than tariff concessions, because it is more likely that they will receive a better offer from a market system than from politicians. 

Energy sector reforms should not only be about simple tariff hikes. When we approach an election, these same politicians will simply use the electricity tariff as a political tool, resulting in a bigger mess. The same will happen for fuel as well. 

In Sri Lanka, the culture of entitlement across all sectors is a genuine issue. This culture is not only present in requesting tariff concessions for religious institutions but also in requesting tariff protections for selected industries. On both occasions, the burden is simply passed on to the common man. When the same thing happens repeatedly, there is only one thing left for the common man to say: “God save us.” 

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.

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.

Timescale confusions in solutions for the crisis

Originally appeared on the Daily FT

By Prof. Rohan Samarajiva

A few days after the tsunami, I was called to an expert meeting at Temple Trees by the then Prime Minister, Mahinda Rajapaksa. I was seated next to Arisen Ahubudu, the famous giver of names. He stated that we had lost too much territory, including Madagascar, and that we could not afford to lose more. He proposed building a wall around the country, using the traditional techniques used in protecting tank bunds, the ralepanawa. I was stunned that such a nice and well-meaning person could come out with such arrant nonsense. He had confused geological time with human time. 

Timescale confusions of a smaller magnitude are evident among many proposing solutions to our current multi-faceted crisis. 

Solutions to power cuts

We all experience the problem. Some of us understand the cause: no dollars to pay for fuel for the generators that make up for the shortfall from lower production from the hydro generators and Norochcholai. Even if we had the dollars, such fuel is priced in dollars and subject to price fluctuations that we cannot control. It is common sense that we should shift to electricity produced by renewable sources such as solar and wind. 

The problem is that under current market and technology conditions, both the distribution network (low voltage) and the transmission network (high voltage) are limited in how much solar- and wind-generated electricity they can accept. We can, and should, increase the use of electricity from renewable sources, but we need to upgrade the transmission network to be able to do so. Solar panels yield electricity when the sun is out (not at night and not when clouds pass over the panels); the wind will produce electricity even in evenings when our use is highest, but it is still intermittent. Batteries are not cost-effective yet.

Given the need to balance supply and demand of electricity in real-time caused by lack of cost-effective storage technologies, we need a large and modernised system in order to absorb more energy from these intermittent sources. We need to invest in upgrading the national grid and possibly connect to the large Indian grid. Feasibility studies must be done, and investment mobilised. It will take several years for the desired outcomes to be achieved. Increasing solar- and wind-based energy is not a viable solution for our immediate problems, though it is a solution in the long term. Within the applicable timescale, what we need are dollars for coal and diesel.

Promotion of manufacturing

Twin deficits, exacerbated by recent economic mismanagement, caused the crisis. More exports would have addressed the current-account deficit and may have helped with the fiscal deficit if the right tax policy was in place. Roughly $ 11 billion was earned from the export of goods such as apparel, tea, and value-added rubber products before the pandemic. Around $ 7 billion was claimed from service exports such as tourism, software and business process outsourcing. 

It is true that the East Asian Tigers and China took their people out of poverty through the production of goods for export. One has to ask why Sri Lanka (and to a significant extent, the rest of South Asia) failed to ramp up the production of goods for export, relying more heavily on service exports. One could even argue that the apparel industry is a service industry. A tailor who makes a suit out of material given to him is undoubtably a provider of services. The Sri Lankan apparel industry, which is the largest importer as well as the largest exporter, is doing what a tailor does, at scale. If it is manufacturing, it is manufacturing lite.

Until the market opening in 1978, the answer to the question of why we had no industries was that our private sector was weak and lacked capital. Therefore, the State went into manufacturing: steel, plywood, tyres, sugar, paper, shoes, cooking implements, etc. were all produced by fully State-owned enterprises under protection. They produced shoddy goods at high prices for the local market and lost enormous amounts of money. The plywood factory resulted in the clear-cutting of half of Sinharaja. After the market was opened to imports, they went out of business.

Since 1978, we have relied on private investors, with or without foreign partners, to manufacture for export (and for domestic use). They have tended to invest in sectors that did not rely too heavily on cheap energy (because our electricity prices were high, especially for industrial users). Except in the case of a few sectors such as apparel and rubber-based products, our producers failed to secure access to markets. Restrictive laws and para tariffs hindered local producers from getting integrated into global production networks, with very few exceptions. 

So, the industrialisation prescription as a solution to the crisis will take time and effort to implement. We would have to ensure reliable and low-cost energy (and other infrastructure services such as waste disposal), eliminate para-tariffs, and create the conditions for market access. The latter is the most challenging. 

Investors such as Michelin ensured market access for the solid tyres produced in Sri Lanka. The apparel industry also benefited in the early stages from foreign investors who facilitated market access. Attracting such investors and entering into trade agreements are needed for market access. But both take time. 

Industrialisation may be a good solution, but it is not for the Government to decide on manufacturing priorities. Because China has established itself as the factory to the world, countries such as ours must identify and exploit niches. Those best positioned for this are those with intimate knowledge of the markets, with skin in the game, namely private investors. The State must create the conditions and leave the actual investment decisions to such players. All this will occur on a timescale different from what is relevant to emerging from the present crisis.

Constitutional reforms

It has become evident that the hyper-presidential system created by the 1978 Constitution has failed to yield the promised benefits and has caused serious damage after the enactment of the 20th Amendment, which removed all the checks that were placed on the President by the 19th Amendment. For example, the Minister of Finance has stated that specific officials were responsible for the tax cuts that triggered the present crisis and the delay in debt restructuring. In the current system, the sole authority for those appointments was the President who must therefore be held accountable for the current crisis.

To address the demands of the protestors, the President must go. He must resign or be impeached. The former can take place immediately would allow the country to return to normal (if such a condition exists after the devastation wreaked by the President and his appointees). The time taken to impeach will be too long. 

The next best solution is to reduce the powers of the President. This would require a Constitutional amendment. An amendment that is approved by Cabinet can be completed within around six weeks. If it is moved as a private member’s motion, it could take more than six months, outside the timeframe needed to calm the country and get the debt restructuring done. The announcement that the Government is proposing the restoration of the 19th Amendment suggests a solution within the required timescale. Of course, it would be necessary to scrutinise the proposed amendment and ensure the President’s powers are meaningfully reduced immediately.

In innumerable discussions I have participated in, I hear proposals for Constitutional reform that pay no heed to the time factor. Some talk of a Constitution authored by the people, modelled on what is going on in Chile. The process began with an amendment to the Constitution and a referendum in 2020. This was followed by an election for a Constituent Assembly in April 2021. Its deliberations are ongoing. How realistic is this kind of process for the kinds of issues that have brought our people to the streets?

In these days of limited attention (and paper supplies), it would be useful if greater weight is given to the appropriateness of the proposed solutions for the time needed to solve the problems that beset us.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.