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Sri Lanka electricity subsidy corrosive, causing power crises

Taken from economynext.com


ECONOMYNEXT- An electricity subsidy is causing power crises in Sri Lanka and gives greater clout to politicians, a World Bank official said.

“In Sri Lanka, there is a whole complex web of subsidies; electricity subsidies, water subsidies, fertilizer subsidies, guaranteed subsidies,” Senior Director, Development Economics Shanta Devarajan said.

“These subsidies which in principle are intended to help the poor actually are corrosive,” he said, speaking via video conference at a forum organized by the Nightwatchman Society.

“Because of the electricity subsidy, the CEB (Ceylon Electricity Board) is losing money.”

In 2018, a household with low consumption of electricity paid 3.50 rupees a unit, whereas a large household paid 38.27 rupees a unit, which was only second to South Korea’s 46.69 rupees a unit in the Asian region, according to RMA Energy Consultants.

The CEB lost 25 billion rupees in 2018, and is expected to lose 89 billion rupees in 2019.

“It’s a huge drain on resources, and the problem is worse, because there is little resources left to maintain the grid,” Devarajan said.

“There’s power shortages, and you have to purchase thermal power to solve the short-run problems.”

“And the next thing you know, you’ll have the most expensive electricity utility in Asia, and at the same time, the worst performing electricity utility,” he said.

Sri Lanka currently is generating around 36 percent of its power through cheap coal from a power plant that is prone to breakdowns, and around 51 percent of the electricity from expensive oil power plants, amid a drought which has sidelined hydro power.

Experts have warned over the past decade that Sri Lanka will face power crises from 2018 onwards due to a delay in constructing power plants.

Devarajan said the blackouts cause more harm to to the poor.

“These subsidies are not helping the poor because when there are electricity shortages, it’s the poor who go without electricity,” he said.

“The upper class or the upper middle class buy generators, which cost a lot of money and are costly to maintain.”

“There are stories in Sri Lanka that last time there were power shortages, it was so warm and because they couldn’t run airconditioners at home, they got into their Benz cars.”

“If you replace the electricity subsidy, then you raise electricity prices up to the level of cost, so that CEB is not losing money and then you give cash transfers with the money you save, and you target only the poor.”

The savings from targeted cash transfers, and savings from cost-reflective tariffs helps improve the fiscal balance and Sri Lanka’s macroeconomic fundamentals, he said.

Sri Lanka had planned for a electricity cost-reflective pricing formula, similar to the fuel formula, under an International Monetary Fund reform program, but has been delayed for three years.

“Secondly, and more importantly, there’s nothing preventing more efficient electricity utility,” Devarajan said.

“They don’t have go into these high cost thermal plants and they can make long range plans for more efficient power plants.”

He said giving a subsidy sends a wrong market signal for consumption.

“You are telling people, that the way you get a benefit from the government is when you consume electricity.”

A cash transfer can instead be spent on anything, including more electricity, starting a business, or educating children, Devarajan said.

“You’re giving more power to the citizen,” he said.

“A subsidy keeps the control in the power of the politicians.”

“You can do cash transfers with the water subsidy, the fertilizer, railways, and anything else.”

However, Sri Lanka also has to improve its cash transfer targeting, Devarajan said.

“When Sri Lanka does cash transfers, it does a particularly bad job of targeting the poor.”

“Around 50 percent of the poor are not receiving Samurdhi benefits, and 50 percent of those who are receiving are not poor,” he said.

He said Samurdhi has now become a political patronage program.

World Bank research in 2018 found that there are better targeting methods for Samurdhi benefits.

Devarajan said that Sri Lanka could learn from Iran in converting utility subsidies to cash transfers.

“Iran spent 30 percent of gross domestic product on energy subsidies and they needed to convert subsidies to cash transfers, but there was a credibility problem.”

“People had a hard time believing, and they did something ingenious”

“They gave a cash transfers on top of the subsidy.”

“They did it in such a way that people could see the cash transfer in the bank account, but they couldn’t spend it until the subsidy was removed.

“The political dynamics worked in such a way that then people started calling their congressmen, and saying ‘please remove the subsidy, I want to use the money,” and things like that.”

ICT Agency Chairman and academic Rohan Samarajiva said that Sri Lankan politics work in such a way that different political parties would be bidding to give higher cash transfers to the public. (Colombo/Apr16/2019-SB)