ADB gives break-and-make deadline
to CEB, but unions offer alternate plan
By Tyron Devotta
The Asian Development Bank has warned the government
that it will not release a US$ 30 million tranche, if it does not
keep to an agreement signed two years ago for the total overhaul
of the country's power sector. The deadline for the loan is June
similar loan offer - also amounting to US$ 30 - from the JBIC (Japan
Bank for International Corporation) expired on March 28. If the
government accepts the ADB loan offer, the Manila-based bank has
said it may consider offering further assistance to help offset
the short-term loans of the Ceylon Electricity Board.
Country Director Alessandro Pio told The Sunday Times the objective
of these loans was to make the CEB a viable institution that was
capable of servicing its debt and supplying power at a reasonable
price. "To that you need to generate power at a price lower
than the level at which one sells it," he said.
CEB's financial burden at present is around Rs. 80 billion, of which
Rs. 27 billion is in expensive short-term loans. With daily losses
amounting to Rs. 35-40 million, the CEB is in urgent need of a rescue
get these loans, the ADB has laid down conditions, foremost among
them is the restructuring of the institution. This could mean the
splitting up or "unbundling" of the CEB into nine state-owned
companies. These companies will handle generation, transmission
and distribution separately. The move is fiercely resisted by CEB
trade unions which warn of blackouts (reluctantly, they say) and
strikes. The unions say restructuring is not the answer to the CEB's
woes and suggest that the government should make the CEB an autonomous
body instead of splitting it up to nine companies.
the ADB is firm on its demand for restructuring and it will release
the US$ 30 million loan only if this is done. This loan is part
of a US$ 60 million ADB package, which was to be released in two
tranches based on the fulfillment of the conditions per tranche.
In terms of the agreement, the tranches were to be released in the
fourth quarter of 2002 and in December 2003.
major conditions for the first tranche are as follows:
i) The government should present the Public Utilities Commission
Bill and the Electricity Reform Bill in Parliament.
All state agencies and state-owned enterprises should pay their
dues to the CEB as of August 30, 2002 (Rs. 800 million)
The CEB should reduce the levels of net receivables to 2.5 months
of electricity sales; and
The government should guarantee the provision of a facility for
funding the CEB's cumulative cash shortfall from December 31, 2000
to December 31 2003 or on the date of completed restructuring, whichever
second tranche conditions include the following:
i) The borrower should establish the Public Utilities Commission
(PUC) and appoint its members
The PUC should independently issue rules and standards for tariff
setting and licensing of generation, transmission and distribution
companies and for the purchase and sale of power in accordance with
the governing law
The new transmission, generation, and distribution companies created
under the programme should obtain all necessary licences and commence
The borrower should implement the unbundling of CEB's generation,
transmission and distribution functions in accordance with the Detailed
Implementation Plan and
The borrower, CEB or LECO, as the case may be, should secure letters
of no-objection from major lenders for the detailed restructuring.
Utilities Commission Director General Prof. Priyantha Wijethunga
said the unbundling of the CEB was vitally important for the industry.
"How can 14,000 (employees of the CEB) people decide the fate
of a sector as against millions of people who are consuming electricity?"
said the unbundling was a policy decision of the Government and
must not be interfered with. He said the unions need not worry about
job security as it had been assured to them (in case of unbundling)
by an Act of Parliament.
Wijethunga said Section 47 of the Electricity Reforms Act No. 28
of 2002 had assured the employees of the CEB that in case of take-over
that they should be offered employment in any one of the successor
companies on terms and conditions not less favourable than enjoyed
by them at present.
PUC chief said he couldn't see any reason for the union’s
fears, as the employees had been guaranteed job security with the
same perks in the new companies to be established. "Probably
they fear the new management style that will prevail in the new
companies. The employees of these new state-owned companies will
have to work differently as in the private sector. All workers will
have to work towards improving efficiency and profits," Prof.
ADB laid down conditions for the US$ 60 million loan in its "report
and recommendation of the president to the board of directors on
proposed loans to the democratic socialist republic of Sri Lanka
for the power sector development program - October 2002 - report
No. RRP: SRI 30207.
report said the financial management system in CEB was antiquated
and based on accounting for expenses incurred and booking them in
the proper accounts. "The CEB has not adopted modern business
practices in cash management and treasury operations since CEB's
internal view is that it has so far not been central to its mission.
In addition, The CEB has felt no need or obligation to address this
shortcoming earlier since it had produced enough energy and had
substantial amounts of soft loans. As a result, there is today no
management information system that can provide the management or
the board of directors, information necessary for decision-making
in an accurate, up-to-date, and integrated manner.
CEB lacks an integrated energy accounting system where the amount
of energy generated is linked to the actual energy billed, and in
turn to the cash collected monthly. Developing proper departmental
and divisional financial budgets, treasury operations plans; increasing
the speed of cash collection, cash placements, and payments made
on due dates so as to utilize the credit terms given will be highly
beneficial to CEB's financial operation and control," the report
said the CEB was run more like a government department than an autonomous
corporation and lacked clear operational and financial objectives.
"The independence and effectiveness of the board of directors
have not turned out, as originally intended and the authority levels
within the CEB are too low and inadequate for almost any purchases
appropriate to those levels. The requirements of public service
management, particularly those justified by the Finance Act and
various regulations, are at the root of many of the problems in
procurement and human resource management, and the absence of management
accountability for results.
poor focus on customer service translates to low quality of electricity
supplies; inconvenient billing processes; and slow response to inquiries,
fault notices, and applications for new connections. In addition,
CEB operations have been guided by politically motivated directions
from the Ministry of Power and Energy (MOPE) rather than by the
boards' own financial and operational needs. As a result, the CEB
has not applied to MOPE for necessary tariff increases, and the
need for decisions related to additional generation capacity is
needed," the report said.
new companies if set up will have monitoring and advisory committees
overlooking them. The board of directors will be appointed in consultation
with this committee. The board will have to be accountable to the
tasks given to them as they will have to work to a business plan
and the cost of production will have to come down."
PUC Director General said there need not be any fear of privatization
as it could not be done without parliamentary approval.
said that at present there was a dire need for accountability in
the CEB. Citing the all-island blackout on Monday, during which
a doctor in a hospital fell to his death in the lift shaft, Prof.
Wijethunga said at present no one could be held accountable. "During
the power cut, we nearly busted all the computers here in the Commission.
We may have lost equipment and valuable data. Now who's going to
be responsible for that?" he asked.
the CEB is restructured there would be far greater efficiency in
the system because people will be able to focus on individual areas,"
he said adding that "It's already happening in LECO, which,
concentrates only on distribution".
is performing far better and is accountable for what it is doing,"
"If the CEB is unbundled into various companies, the regulator
would be able to see to efficiency and make necessary incentives
for individual areas. As a vertically integrated utility I cannot
do that. I have to give either incentives or disincentives to the
whole utility and then the consumer will not benefit by this. A
restructured CEB will certainly bring down the cost of supply,"
Prof. Wijethunga said.
said people could say the overheads would increase if the CEB was
split up into nine companies but that would be nothing compared
to the efficiency improvement the energy sector would gain.
Ceylon Electricity Board's Engineer's Union (CEBEU) dismissed these
claims and said the institution had the ability to recover on its
spokesman Noel Priyantha said the CEB's debt should be reviewed
against its own turnover, as at now the CEB's short term debt amounts
to just over fifty percent of the annual turnover of the institution.
He said that although the figure was massive in real terms, if properly
managed, the CEB could recover on its own as shown in the profit
figures of the past.
Priyantha says that his union was not against reforms. However,
through the unbundling of the CEB, the government and its foreign
consultants were not addressing the proper problems in the CEB.
"They are only treating the symptoms of a problem and not the
root cause of the problem. The main problem that brought the CEB
to its knees is the high cost of generation. Abolishing the CEB
and forming nine companies will not solve the problem and from day
one these new companies too will be running at a loss," he
charged the restructuring was more of an attempt by the government
to secure some quick money and run away without taking responsibility
for a problem created by lack of political leadership and wrong
the formation of the companies the government will no longer be
directly responsible for the financial performance of the companies
and at the end where the companies can end up is anybody's guess,"
Mr. Priyantha said.
on job security, he said any reform process should be done while
the employees' rights were guaranteed. "We were negotiating
with the then government on securing employee rights by signing
a collective agreement before the abolishing of the CEB. But, with
the present government's expressed opposition to reforms soon after
it came to power, all these discussions came to a halt. Now, the
government is once again trying to go ahead with reforms with renewed
vigour, while nothing is mentioned about the previously abandoned
collective agreement or securing employee rights," the union
union has been cautioning the governments for over a decade on the
impending crisis. Now that what we foretold has come to pass, we
also have the way out. We had given the government in writing our
suggestions for reforms and restructuring of the CEB. The union
has proposed that the CEB should be transformed into a government-owned
company. Within that organisation Strategic Business divisions to
be formed, each having decision-making independence and authority
on recruitment, operation and procurement. They should be managed
by different heads who have the ability to ensure acceptable levels
of productivity and financial accountability. Clear performance
monitoring indices should be identified and the head of a unit should
be made accountable for non-compliance and low performance.
should be suitably amended to bring the PUC into action. The PUC
should entertain customer complaints directly and should have the
authority to influence or regulate the units through a suitable
mechanism so that its regulatory function can be properly exercised.
CEB's latest cost generation plan should be immediately implemented.
The Upper Kothmale Hydro Power Project that already has secured
finances should be immediately implemented. The Norochcholai Coal
Power Plant that has all the approvals and studies ready should
be immediately initiated by the government either with soft loans
or using a commercial loan."
union also suggests tariff increases and debt re-structuring.
Whether the unbundling is going to cause more problems or not, the
immediate difficulty the CEB faces, as a whole, is a cash flow problem.
top CEB management official told The Sunday Times the institution
was on a hand-to-mouth existence and it couldn't go on for long.
The CEB at present exists on revenue collected from customers but
it goes to pay salaries and private power producers.
Ministry of Power and Energy has in the meantime asked the Treasury
for Rs. 5 billion but it had not received a reply. In the meantime
a cabinet paper has been put up for a 20 per cent increase in tariff.