Speaker 1  00:02
Last year, the government passed a landmark law to reform Sri Lanka's electricity sector by primarily unbundling the Ceylon Electricity Board, commonly known as the CEB. The law aimed to separate generation, transmission, and distribution functions into distinct corporate entities and open space for private capital and more effective regulation. Now, just over a year later, there's a proposal to undo some of the reforms in this law and return these functions under 100% state ownership. At Advocata, we believe this would be a serious mistake. In this video, I'll explain why. But first, a bit of context. This is not the first time Sri Lanka's electricity sector has faced attempts at reform, but we will not be going into all of that in today's video. The first question to really address is why does CEB reform matter now? Because the CEB, which largely represents Sri Lanka's electricity sector, is financially broken, and the CEB's losses are spilling over into the public balance sheet. In 2024, thanks to tariff hikes and a stable rupee, the CEB reported 144 billion rupee profit. But just a few months later, after a 20% tariff reduction in 2025, it posted an 18 billion rupee loss in the first quarter alone. These swings don't reflect actual performance. They reflect flaws in the current price-setting methodology, where inaccuracies in forecasting lead to temporary surpluses or deficits in monthly accounts, which must later be clawed back. The result is volatility in the system that undermines both investor confidence and fiscal stability. While reforms to the tariff setting framework are clearly needed, it is not sustainable for the CEB to rely primarily on tariff adjustments to maintain profitability. And structural reforms are much needed because of the CEB's effects on public finances. In 2023, the Treasury had to inject 126 billion rupees to keep the CEB afloat. In 2025, it approved 182 billion rupee additional debt settlement. That's real taxpayer money, and it adds to the public's debt. The CEB's high generation costs are a symptom of poor decision making over the years. There has been an alleged reluctance to integrate cost-effective renewable energy and storage solutions, and premature onboarding of LNG infrastructure without a clear pricing or demand strategy in the past. In other words, it's not just about how we price electricity; it's about how we plan, procure, and manage the entire system. These inefficiencies in a competitive environment would have been exposed and corrected, but in a vertically integrated monopoly, they persist, hidden and unaccountable. And when things go wrong, it's the treasury and ultimately the public that foots the bill. As long as the CEB remains a vertically integrated monopoly, these inefficiencies will continue. Regulators can't enforce discipline when the utility they regulate is also the owner and operator of a majority of the country's electricity. So the need for reform isn't ideological. It's fiscal, it's structural, and urgent. So back to why the proposed amendment is flawed. There are three reasons. Reason number one: Sri Lanka's current fiscal and investment constraints demand private capital. Sri Lanka is still in the throes of post-crisis recovery. After defaulting on our debt in 2022, we've committed to an IMF programme with strict fiscal targets, like maintaining a primary surplus and capping public spending in 2024, capital expenditure fell by 15% compared to 2023. Interest payments consumed nearly two-thirds of government revenue, and public investment dropped to just 2.7% of GDP. There simply isn't enough fiscal room to fund major infrastructure projects like electricity networks, because when most of the government's revenue is locked into salaries, subsidies, and debt service, SOEs like the CEB may borrow outside the central budget, but that debt still affects public finances. Treasury guarantees, letters of support, and emergency bailouts all add to the government's contingent liabilities. On top of that, new rules under the Banking Act and the Public Debt Management Act are tightening access to sovereign guarantees. SOEs like the CEB now face higher guarantee fees and tight borrowing limits from local banks. In fact, news reports reveal that to borrow USD 50 million from the Asian Infrastructure Investment Bank, the CEB had to offer the Treasury a 4.8 percent premium. That's how expensive public borrowing has become. This context makes it clear Sri Lanka must actively attract private capital into the sector, especially in commercially viable. Areas like generation and grid development, and there's long-term opportunity for us too.

Speaker 1  05:04
As Sri Lanka's population ages, pension funds, both locally as well as from foreign sources, will look for more stable, long-horizon investments. And utilities like electricity are ideal for this kind of capital. But to unlock it, we need structure, we need credibility, and investor confidence, not centralization, because it prevents investors from investing in a targeted niche which fits their risk or return profile. Reason number two: unbundling brings proven economic benefits. Let's look at why unbundling matters. When a single utility handles everything from power generation to household billing. It creates conflicts of interests and inefficiencies. There's no internal competition, no price transparency, and regulators have little leverage. That's why many countries have already gone ahead and separated the potentially competitive parts like generation and supply from natural monopolies like transmission and in distribution, there are several ways to do this through structural separation, where competitive and monopoly functions are placed in different legal entities; functional or operational separation, where these functions are run independently inside the same group, where either separate accounts are maintained for its competitive and monopoly functions, or personnel and operations of these entities would be separated through ring fencing measures, etc. Or full corporate separation, where ownership of a competitive or monopoly function is divested fully, so it is no longer part of the same corporate group. Global evidence shows that unbundling improves service quality, increases investment, and reduces losses. In countries like Chile, Brazil, and India, reforms have led to higher productivity, better maintenance, and lower technical losses. Reason number three, which is probably the most important, strategic interests can be protected without full state ownership. A common argument for full state ownership is that electricity is strategic, and that's true. It's essential for national development, national security, and industrial competitiveness. We need to move away from the idea that public ownership guarantees public interest. In practice, monopolies, especially ones protected from competition, often become inefficient, unaccountable, and vulnerable to political interference. As electricity becomes even more critical for industries like AI, data centres, and manufacturing, we need a system that is cost-effective, responsive, and credible. So, creating a competitively neutral electricity market where public and private operators are held to the same standards is not just about regulation. It's about unlocking long-term growth. So yes, electricity is strategic, but protecting that strategic value doesn't require the state to run everything. Let's look at each segment and how holding 100% ownership is not actually required. Firstly, with electricity generation, unlike transmission, it's not a natural monopoly. Different technologies-hydro, coal, wind, thermal-each of them have distinct investment and management needs. So, bundling them into a single state-owned company, as proposed in the 2025 amendment is inefficient. It discourages innovation and reduces accountability. Hydropower may remain under public control due to its multiple mandates like irrigation and drinking water, but coal, thermal, and wind can be run by private operators under regulation without compromising national interest. New Zealand demonstrates this balance quite well. Three major generation firms have a mixed ownership model, where there is majority state ownership, while others are fully private. In situations where the government deems it necessary to step in to ensure supply security, targeted public interventions have taken place without undermining the mixed ownership model of these companies. For instance, in 2004, the New Zealand government commissioned the 155 megawatt oil-fired reserve power plant at Hawke's Bay to provide backup generation during periods of low hydro inflows or major plant failures. Notably, while the plant was state-owned, Contact Energy, a private company, was contracted to instal and operate it, demonstrating how public objectives can still be achieved through partnerships with the private sector. So, state control can still be ensured through 51% equity ownership, regulatory oversight, or strategic asset protection clauses without reverting to full vertical reintegration, which crowds out private capital, disincentivizes efficiency, and reintroduces the inefficiencies that reforms were meant to correct. Let's look at transmission. It's a natural monopoly, and there are natural monopolies because of the high fixed costs and inefficiencies associated with duplicating network infrastructure in the same region. But that doesn't mean it must be 100% state-owned. In Argentina, the national grid is operated by Transina, a private concessionaire under a long-term contract. Performance is monitored, and the government retains the right to revoke or rebid the concession if needed. What matters is how the system is regulated, not who owns the wires.

Speaker 1  10:21
Transparent auctions, open access rules, penalties for non-performance, and step-in rights, which can be laid out in the contracting stage, all ensure that public interest is protected. There is little to no chance of potential abuse of market position by private companies, such as by overcharging, holding the grid hostage or delayed connections if there is strong regulatory oversight and enforcement. The same goes for distribution, which is also a natural monopoly. Let's take our very own local example of Leco, which is a majority state-owned distributor with commercial governance and has consistently outperformed the CEB's internal divisions; it has lower commercial losses, higher billing efficiency, and better service delivery. This success stems from the advantage of the length of its transmission network compared to the CEB, but also more because of its autonomy and incentives. The 2024 Act proposed four Leco-style distributors across the country. This would allow benchmarking, innovation, and regional responsiveness, since distribution companies are responsible for both the distribution and supply functions, and will continue to do so for the foreseeable future in Sri Lanka. The 2025 amendment, on the other hand, would erase this model, re-centralizing everything into one massive state-run distributor. That would reduce transparency, kill performance incentives, and make the entire system more vulnerable to political interferences. Over time, Sri Lanka could go even further, unbundling distribution and supply, and allowing competitive retail markets, as seen in Australia or parts of Europe. So to recap, Sri Lanka cannot afford to manage the electricity sector using public funds alone. We really need private capital. Second, unbundling is a proven way to improve efficiency, accountability, and investments in the sector. And third, strategic goals can still be safeguarded through regulation and oversight, and not by re-centralizing everything under the CEB. The 2025 amendment risks dragging us back into a model that failed us before. If we truly want a modern, resilient electricity sector-one that delivers affordable and reliable power. We must stick to the path of reform. So let's not repeat the past. Let's move forward.


Transcribed by https://otter.ai