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Cablegate: Sri Lanka Defers Fate of Government Owned Electric

This record is a partial extract of the original cable. The full text of the original cable is not available.

120437Z May 05

UNCLAS SECTION 01 OF 03 COLOMBO 000872

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ENRG ETRD ELAB PGOV CE ECONOMICS
SUBJECT: SRI LANKA DEFERS FATE OF GOVERNMENT OWNED ELECTRIC
MONOPOLY

REF: A. Colombo 615 B. Colombo 813

1. (U) Summary: The Government was forced to shelve its
electricity sector restructuring plans on May 7, for the
second time in five weeks, due to strong protests by
unions. The withdrawal came after the Government failed
to secure the support of unions affiliated with the
Government's alliance partner, the Marxist-Nationalist
Janatha Vimukthi Peramuna (JVP), even after the
destructuring plans were amended based on union demands
and fell far short of ADB and Japanese requirements that
the CEB disband and privatize or be restructured into
public-private partnerships. Instead, the Government has
now decided to consult the trade unions and the JVP to
draw up fresh plans for restructuring. This move
conveniently defers possible strikes until after the
completion of this week's IMF Article IV meetings in
Colombo, which will focus on public sector finance and
economic policies. In an unrelated move, Sri Lankans
experienced a 9 percent petroleum price hike last week as
the government announced it could no longer maintain
subsidies at current levels. End Summary.

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Controversial CEB restructuring plans withdrawn again

2. (U) On May 4, the Cabinet approved a controversial
plan to restructure the state-owned Ceylon Electricity
Board (CEB), an initiative hotly opposed by CEB unions
and the Government's Marxist alliance partner Janatha
Vimukthi Peramuna (JVP). According to P. Weerahandi,
Secretary of Power and Energy, the Cabinet gave its

SIPDIS
approval to set up nine different state-owned companies
under the CEB (which is to be turned into a state-owned
holding company) to handle generation, transmission and
distribution of electricity. All of these functions are
currently handled by the CEB. The Cabinet had also
approved a memorandum to amend the Electricity Reform Act
to prevent privatization of the CEB unless approved by a
2/3 parliamentary majority.

3. (U) The JVP party walked out of the May 4 Cabinet
meeting in protest. Although the amended plan differed
from an original proposal to set up nine independent
companies -- with a view to their ultimate privatization,
it allowed CEB to maintain control of the independent
companies and requires parliamentary approval for
privatization, the government failed to win the support
of the trade unions and the JVP, which continue to accuse
the government of attempting to sell strategic government
assets.

4. (SBU) Following the May 4 Cabinet meeting, the
President met with the CEB union leaders to explain the
new restructuring plans. Her attempts to win over the
labor leaders were unsuccessful, and the unions and the
JVP threatened to strike and disrupt the power supply.
On May 7, the Prime Minister and several other key
officials met with the JVP and the Unions and agreed to
withdraw the Cabinet decision. The Government team also
gave a written assurance promising to redraft the reform
plans after consulting the unions and the JVP. The
proposed model contains plans to create subsidiary
companies within the CEB. The statement also promised to
take donor considerations (Japan and ADB) into account.
In response to these promises, the unions and JVP called
off their protests. The Secretary of the CEB Engineers
Union (CEBU), Mr. Athula Wanniarachchi told Econ FSN that
his union is agreeable to the new plan, which proposes to
have 100 percent government-owned subsidiary companies
under the CEB. However, he expressed doubt with regard
to other unions. He is also skeptical about coming up
with a plan that could satisfy both donor requirements
and JVP led union demands. A Japanese Embassy official
told the visiting IMF delegation that the JVP could live
with separate companies, but not privatization. However,
Japan made clear to the GSL that it would not extend its
deadline for a proposal beyond June 30. CEB Chairman
Ananda
Gunasekera told Econchief that the professional CEB staff
was largely in favor of the restructuring, but that the
CEB General Manager and union leaders are pursuing their
own agendas, fearful of what a leaner CEB staff will mean
to their power and influence.
Urgent remedies required

5. (U) The most important energy sources in Sri Lanka
are electricity and petroleum. Supply of both energy
sources are, to a great extent, controlled by the
Government-owned CEB and the Ceylon Petroleum Corporation
(CPC). Both these suppliers are heavily in debt. The
CEB posted a loss of Rs 15 billion (approximately
USUSD150 million) in 2004 and it is now unable to service
its short-term debt of Rs 27 billion (USD 270 million).
CPC's 2004 losses are not known, but its accumulated debt
was around Rs 23 billion
(USD230 million) at end of 2004 up from Rs 15 billion
(USD150 million) in 2003. The Central Bank, in its
2004 Annual Report released last week, warned that the
financial performance of the CEB, CPC and the Sri Lanka
Railways (which runs the rail system in Sri Lanka) has
worsened and could threaten macro-economic stability,
given the strategic importance of the services they
provide. One of the main reasons for the current losses
of the CPC and CEB is the failure of the Government to
adjust fuel and electricity prices in response to global
oil price hikes. On several occasions the Finance
Minister has said that the price of electricity could be
reduced after restructuring of the CEB. However, the
Government has not been able to convince the unions nor
the general public of this.

CEB woes mounting

6. (U) CEB losses are also the result of a heavy
reliance on "thermal power" (i.e. oil, diesel). The
total installed electrical capacity is about 2,358MW with
a hydro/thermal balance of 54:46. Electricity demand is
growing by 10 percent per year. In 2004, 57 percent of
the demand was met by thermal power, due to a drought.
Most of the thermal capacity comes from high-cost diesel
plants operated by the CEB and Independent Power
Producers (paid by the CEB). The reliance on high-cost
thermal power, and delays in procuring low cost power
such as coal, have led to generally high electricity
tariffs. In addition, despite oil price hikes, the
electricity tariffs remained unchanged in 2004, leading
to losses at the CEB. For these reasons, the Government
has been contemplating restructuring of the CEB for a
long time.

7. (U) Political and union opposition to reforms have
delayed a number of proposed reforms, including plans to
procure low cost coal power. No major steps have been
taken to procure coal power due to protests by
environmental groups and local residents, supported by
religious and other social groups. There is little
political will to take on these entrenched interests.
There have been other delays in the development of new
generating capacity as well. A medium sized hydro power
plant funded by a Japanese loan has been delayed for
years. The CEB Engineers unions believe the solution to
the problem lies in implementing these projects as soon
as possible, and blame the government for its failure to
implement these projects in a timely manner. The unions
are pressing the Government to accept a Chinese offer
(Ref B) to build a power plant on concessionary terms

Petroleum -- price hike

8. (U) Meanwhile, the Government on May 4 took steps to
increase fuel prices by about 9 percent, the first price
revision since September 2004. The price of a liter of
gasoline was increased by Rs 6 (6 US cents), diesel by Rs
4 (4 US cents) and kerosene by Rs 3 (3 US cents). The
new price of a liter of petrol will be Rs 74 (74 US
cents), Diesel Rs 46 (46 US cents)and Kerosene, used in
low-income households for cooking, Rs 28.50 (28 US
cents).

9. (SBU) COMMENT: The CEB's financial situation, with
its history of delayed payments and increased difficulty
in obtaining financing, is cause for great concern in a
country with only one electricity provider.
Restructuring will be painful for the electric company,
which employs many times the number of employees
required. As seen by the events of last week, the ruling
coalition, which eyes privatization with suspicion and
prefers government intervention, will be hard pressed to
oppose its traditional allies and advocate what could be
a lean, privatized, and efficient utility. Yet, the
government urgently needs to come up with a meaningful
restructuring plan (disbanding and privatization or
public-private partnerships) in this vital utility, to
secure concessionary financing promised by the ADB and
Japan as well as to convince other donors/lenders that it
is going to significantly restructure the sector. The
ADB and Japan donor programs would pump about Rs 6
billion (USD600 million) into the electricity sector
easing the financial situation of the CEB and allowing
expansion. It also remains to be seen how the government
will proceed on the second major problem facing the
electricity sector -that of procuring low cost power.
Sri Lanka's future economic growth, and competitiveness
will largely depend on the government moves in these two
directions.

LUNSTEAD

© Scoop Media

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