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Power in crisis
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 2005.

A 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.

ADB 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.

The 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 mechanism.

To 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.

But 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.

The 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.

ii) All state agencies and state-owned enterprises should pay their dues to the CEB as of August 30, 2002 (Rs. 800 million)

iii) The CEB should reduce the levels of net receivables to 2.5 months of electricity sales; and

iv) 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 is sooner.

The second tranche conditions include the following:
i) The borrower should establish the Public Utilities Commission (PUC) and appoint its members

ii) 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

iii) The new transmission, generation, and distribution companies created under the programme should obtain all necessary licences and commence operations

iv) The borrower should implement the unbundling of CEB's generation, transmission and distribution functions in accordance with the Detailed Implementation Plan and

v) The borrower, CEB or LECO, as the case may be, should secure letters of no-objection from major lenders for the detailed restructuring.

Public 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?" he asked.

He 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.

Prof. 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.

The 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. Wijethunga said.

The 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.

The 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.

"The 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.

It 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.

The 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.

"The 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."

The PUC Director General said there need not be any fear of privatization as it could not be done without parliamentary approval.

He 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.

"If 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".

"LECO is performing far better and is accountable for what it is doing," he said.
"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.

He 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.

The Ceylon Electricity Board's Engineer's Union (CEBEU) dismissed these claims and said the institution had the ability to recover on its own.

Union 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.

Mr. 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 said.

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 political decisions.

"After 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.

Commenting 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 spokesman said.

"Our 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.

"Legislation 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.

"The 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."

The 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.

A 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.

The 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.

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