The serious business of ageing and caring

David Foot in his book, Boom Bust and Echo has brought out the importance of demographics for the economy and argued that it is a powerful explanatory variable for the rise and fall of businesses. In his view, "Demography is the most powerful and the most under-utilised tool we have to understand the past and to foretell the future. Demographics affect every one of us as individuals, far more than most of us have ever imagined." Foot makes the bold assertion: " Demographics explains about two thirds of everything".

The business community would be very interested to know that demographics tell us " a great deal about what products will be demanded in five years" and accurately predict the demand for many other things as well. Sri Lanka's impending demographic changes are astounding. We are expected to be the only poor country to have an elderly population of over 20 percent in 2020-25. The rapidity of the ageing process in Sri Lanka is unprecedented in world history. The ageing process that took 45 to 145 years in Western Europe will take only about two decades in Sri Lanka.

One of the areas needing serious consideration is retirement benefits and pension reform. Although the country has several social security systems, such as the Employees' Provident Fund (EPF), the Employees' Trust Fund (ETF), private pension schemes and a pension scheme for public servants and their widows and orphans, these do not adequately cover the expenditure needs of the elderly at retirement owing to several reasons.

The retirement benefits cover only about one half of the elderly as most employment is in informal activities. Therefore the workers who are in the un-organised or informal sector have to rely largely on their savings. The already inadequate coverage of persons under social security programmes is aggravated by the fact that these persons would require means for an extended period of life. Life expectancy that is currently at about 72 years is expected to increase to 75.8 years in 2020- 2025. These added years of life require to be financed from savings during the working years.

Even where EPF, ETF and other private schemes cover employees, they are most often inadequate. These schemes have low returns on funds and expected annual real incomes from them are both inadequate and diminishing over time owing to inflation. There is also the issue of viability of pension schemes. Increased longevity means that pension schemes would have to pay out monthly pensions over a longer period of time. The extended period of life implies that any pension scheme to be sustainable would require significantly larger contributions from employers and employees during the period of employment.

There are serious implications of ageing on the public finances of the country. At present government pensions absorb 10 percent of current expenditure and accounts for 20 percent of the budget deficit. Government pensions could absorb as much as 20 percent of expenditure in the future and distort the public expenditure pattern with serious implications for public investment and economic growth. An extension of the retirement age to 65 years would place a lesser strain on current contributions, could increase retirement benefits and would reduce the period during which the retirement benefits would be needed to support the retirees.

The increased longevity of life will increase the demand for institutional means of caring for the elderly. Old age homes - more in the character of senior citizens' homes - would need to be established. 

The private sector could be involved in building such infrastructure for senior citizens who are able to pay for such facilities.

The changing demographic scenario provides opportunities for the private sector to improve the quality of life of the increasing elderly population. They also require planning their investments on the basis of projected demand of the changing population profile.

The power crisis:

What should be done to light the way?

By the Grid Connected Small Power Developers' Association

The CEB and the government may well decide to purchase emergency power from wherever it is available, including the infamous Agrekko power plant from which power was purchased at Rs. 12 per kWh earlier this year. Even if the process of negotiation for bringing in emergency power is completely transparent it is unlikely that the CEB will be able to purchase energy at less than Rs. 7 per kWh. Adding the CEB's transmission and distribution system losses to this amount, it will cost the CEB Rs. 7.70 per kWh for the energy supplied to its customers. Since the average price the CEB receives for the energy it sells is only around Rs. 5.70 per kWh, the CEB will lose Rs. 2.00 per kWh on these units. The situation is even worse with the CEB's own new Kelanitissa gas turbine that uses auto diesel and costs around Rs. 7.50 per kWh just to operate without considering the capital cost. The CEB loss on this generation will be Rs. 2.50 per kWh.

Under-utilisation of thermal power

The CEB and the government have ignored basic economic principals in resorting to power cuts since July. What should have been done and what should be done even now is to significantly increase electricity prices immediately by adding a further 50-60% surcharge to the present 25% surcharge on electricity prices. 

Poorer consumers should be insulated from this increase by exempting the first two brackets (a monthly consumption up to 90 kWh) from this additional surcharge. Since only about 10-15% of the CEB's total revenue is from the sale to poorer consumers, the surcharge will result in the average price per kWh received by the CEB increasing to approximately Rs. 8.50 per kWh. At this point the CEB will be earning a profit on the energy it generates even from its Kelanitissa gas turbine and from the private thermal power it purchases. This will result in greater financial flexibility for the CEB and prevent the CEB cutting power just to save money.

More importantly, with such a large increase in prices economic forces will come into play and consumers will cut back at least 20% of their consumption which is equal to the amount of energy which the CEB will save with its eight-hour power cuts. (Even affluent consumers are likely to make attempts to conserve with such a large increase, by switching off unnecessary lights, fans, air-conditioners, etc.). Unlike power cuts which arbitrarily impact on all consumers irrespective of how they value the electricity they consume, the reduction in consumption with increased prices will come from those who value electricity the least, which is much more efficient from an economic point of view.

Temporary tariff hikes

While a large price increase will immediately throttle demand and eliminate the need for power cuts, it is not the solution in the medium or long term. Leaving aside long term options such as building a coal power plant five years down the line, what can be done over the next 1-2 years to prevent a recurrence of the present power shortages? The CEB and the government must encourage as much private generation to come on line as possible in the short term. The main options in this context are:

1. Negotiate with large international power developers to bring in diesel-based power plants right away. The contracts should be for five years or longer if the power is to be purchased at a reasonable rate. It makes no sense to term such plants as "emergency power" and ask such developers to bring in a plant for 12 months or shorter (say) as was done in the case of Aggreko since the costs of mobilising and demobilising such plants is very high and the developers will want to cover such costs by charging it into the average price per kWh during the 12 months, resulting in at least Rs. 1-2 per kWh extra.

2. The government should provide loans through the state banks to encourage private factory owners to immediately install generators in their factories to meet all of their own demands and sell the excess to the grid. The generators purchased – which will typically vary in size between 200-400 kVA – should be capable of continuous operation and include the necessary safety devices required for grid connection. 

The typical "stand-by" generators that most factory owners purchased during the last power crisis are not capable of continuous operation and are not suitable for providing power to the CEB grid. If the 500 tea factories in the country alone purchased such generators the total installed capacity would be around 100 MW, which would reduce grid peak demand by at least 50 MW, eliminate the present consumption from the grid by these factories (which is about 5% of total energy supplied by the CEB) and provide additional energy to the CEB grid of a like magnitude for use by other consumers. Since industrialists realise that the country will be faced with recurring power shortages over the next five years they will view favourably the option for them to provide their own power with the CEB grid acting only as back up.

3. Full encouragement should be given by the CEB for the development of small hydropower. The potential for such power in the country is at least 300 MW which is equivalent to 30% of the capacity of all the large hydro power plants in the country and if 100 MW of such plants had been commissioned up to now, rather than the 23 MW that has actually been built up to now (over half of this came in the last four months), there would have been no power crisis today since the energy produced by 100 MW of small hydro power plants (around 500 million kWh per year) if built by the end of last year would have been available to meet the energy shortfalls this year. 

Only 23 MW have been built because the CEB was paying less than Rs. 3 per kWh in 1999 and 2000 for power supplied by small hydro power plants, less than half what the CEB was paying large private power plants in the same years. Even today the CEB is paying small hydro developers Rs. 4 per kWh when even the lowest priced thermal power plant is being paid around Rs. 7 per kWh and some power plants such as Aggreko were paid as much as Rs. 12 per kWh.

Because of a dispute between the CEB and small hydro developers about the price paid for small hydro power the parties agreed to appoint an independent consultant – Dr. Tilak Siyambalapitiya, a noted expert in the field who is a former senior engineer in the CEB and who continues to work closely with the CEB – to study the rate calculations that had been carried out by the CEB using the method specified in the agreements between small hydro developers and the CEB. The consultant found that the CEB had calculated the rates incorrectly and that small hydropower producers should receive Rs. 5.03 per kWh for 2001 rather than the Rs. 4 per kWh the CEB is paying. The CEB and small hydropower producers were given an opportunity to comment on the consultant's draft report and these comments were taken into account by the consultant in making his final determination on rates. In spite of agreeing to be bound by the consultant's findings and in spite of the consultant clearly pointing out that the CEB calculations were incorrect the CEB has subsequently refused to increase rates for 2001. Even worse, the CEB has just published an "indicative price" of Rs. 4.72 per kWh for 2002 which is lower than the rate that the consultant stated should be paid even for 2001, and substantially below the Rs. 7 per kWh that the CEB is offering to industrial consumers who reduce consumption from the CEB by using their own generators and the even higher amount per kWh paid to large thermal power producers by the CEB.

Questionable pricing policies

4. Small hydro power plants are unable to provide energy to the CEB grid during the eight-hour power cuts because the CEB disconnects the 33 kV transmission lines through which such plants provide power to the grid during power cuts. 

The CEB has no legal right to do so, but it continues with this practice because of financial reasons. (If the feeders are not disconnected other customers on the same 33 kV line would also receive power and the CEB does not want to provide such power because the revenue it receives from such customers is smaller than the CEB's marginal cost of generating the power.) Since small hydropower plants do not store water like the CEB's large hydro power plants the potential output of these plants during the power cut times is lost forever. 

With the present rains that have just set in the grid is losing about 120,000 kWh per day of generation that would have been available from the 23 MW of small hydro power plants connected to the CEB during power cuts. As a result small hydropower producers are losing almost Rs. 500,000 per day. The CEB must be required to keep the 33 kV transmission lines through which small hydropower plants supply power to the grid energized during power cuts.

In summary, the immediate imposition of a 50-60% surcharge on all electricity bills, (excluding the charge for the first 90 kWh of consumption each month), will allow power cuts to be eliminated. Implementing the four other proposed options would ensure that power shortages will not arise in the medium term (1-3 years) thereby providing the CEB and the government sufficient time to address the issue of meeting long term demand.

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