After pulling out of a CEB loan pact in 2006

ADB back with fresh power sector talks

By Bandula Sirimanna

The Asian Development Bank (ADB) which pulled out a major power sector loan last year is back with fresh loan negotiations with the government following a decision to replace power sector reforms with a regulatory process rather than privatisation. Johanna Boestel, ADB economist in Colombo, told The Sunday Times FT that the Bank was satisfied with the government’s plan to regulate the country’s power sector and is in the process of considering the granting of further assistance.

Last week The Sunday Times FT reported that the government had opted for a regulatory process of the power sector as against controversial changes to the Ceylon Electricity Board (CEB) in the wake of criticism from trade unions, the JVP and a Supreme Court decision. The ADB is in the process of assessing CEB project proposals before making recommendations to its board of governors for funding. Head of the CEB reforms division Nihal Wickremasooriya said the ADB had disbursed US$ 30 million out of the US$60 million loan programme but withdrew – with agreement from the government -- granting the balance since the CEB had failed to complete power sector reforms that include establishing independent regulatory and tariff setting mechanisms, introducing competition and commercialization encouraging private sector participation on time.

This loan was granted in the year 2002 and the cancellation was made in mid April 2006. ADB’s Boestel said the Bank will look into the drain on national resources arising from the financial deterioration of the CEB.The CEB has proposed a Power Sector Development Programme that will also help mobilize more resources for the sector and fund new distribution lines and connections in rural areas, as well as improve the existing network. She said the reforms will help develop an efficient, self-sustaining and competitive power sector.

Under current plans following the enforcement of a regulatory mechanism, the government is stepping in to ease the debt burden of the CEB amounting to a staggering Rs 62 billion. A decision has been taken to treat 50 percent or Rs 31 billion from the total debt as equity capital while the CEB has been granted a grace period till the completion of the Norochcholai coal power project in 2010 to repay the balance Rs 31 billion, a senior official of the CEB told Sunday Times FT. The board has been burdened with this heavy debt on its books, mainly due to selling electricity at an average of Rs 10.67 a unit, well below the Rs 12.25 per unit cost of generation. The costs of generation have reached Rs 2.25 a unit owing to CEB’s heavy dependence on expensive thermal fuel.

Commenting on the power sector reforms, Dr Tilak Siyambalapitiya, energy sector specialist, said he would have preferred to see the government taking care of the short term debt which is losses due to not raising tariffs, and the CEB taking care of long term debt which are repayment of project loans. “This is a responsibility of the government as the CEB was not permitted to raise tariffs and cut losses,” he said, instead of the other way round. He said the regulatory process was workable and should have been done 10 years ago as there are no political disputes over this mechanism.