US embassy cable - 05COLOMBO872

UNCLAS SECTION 01 OF 03 COLOMBO 000872 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, ETRD, ELAB, PGOV, CE, ECONOMICS 
SUBJECT: SRI LANKA DEFERS FATE OF GOVERNMENT OWNED ELECTRIC 
MONOPOLY 
 
REF: A. Colombo 615 B. Colombo 813 
 
1.  (U) Summary:  The Government was forced to shelve its 
electricity sector restructuring plans on May 7, for the 
second time in five weeks, due to strong protests by 
unions.  The withdrawal came after the Government failed 
to secure the support of unions affiliated with the 
Government's alliance partner, the Marxist-Nationalist 
Janatha Vimukthi Peramuna (JVP), even after the 
destructuring plans were amended based on union demands 
and fell far short of ADB and Japanese requirements that 
the CEB disband and privatize or be restructured into 
public-private partnerships.  Instead, the Government has 
now decided to consult the trade unions and the JVP to 
draw up fresh plans for restructuring.  This move 
conveniently defers possible strikes until after the 
completion of this week's IMF Article IV meetings in 
Colombo, which will focus on public sector finance and 
economic policies.  In an unrelated move, Sri Lankans 
experienced a 9 percent petroleum price hike last week as 
the government announced it could no longer maintain 
subsidies at current levels.  End Summary. 
 
Controversial CEB restructuring plans withdrawn again 
 
2.  (U) On May 4, the Cabinet approved a controversial 
plan to restructure the state-owned Ceylon Electricity 
Board (CEB), an initiative hotly opposed by CEB unions 
and the Government's Marxist alliance partner Janatha 
Vimukthi Peramuna (JVP).  According to P. Weerahandi, 
Secretary of Power and Energy, the Cabinet gave its 
 
SIPDIS 
approval to set up nine different state-owned companies 
under the CEB (which is to be turned into a state-owned 
holding company) to handle generation, transmission and 
distribution of electricity.  All of these functions are 
currently handled by the CEB.  The Cabinet had also 
approved a memorandum to amend the Electricity Reform Act 
to prevent privatization of the CEB unless approved by a 
2/3 parliamentary majority. 
 
3.  (U) The JVP party walked out of the May 4 Cabinet 
meeting in protest.  Although the amended plan differed 
from an original proposal to set up nine independent 
companies -- with a view to their ultimate privatization, 
it allowed CEB to maintain control of the independent 
companies and requires parliamentary approval for 
privatization, the government failed to win the support 
of the trade unions and the JVP, which continue to accuse 
the government of attempting to sell strategic government 
assets. 
 
4.  (SBU) Following the May 4 Cabinet meeting, the 
President met with the CEB union leaders to explain the 
new restructuring plans.  Her attempts to win over the 
labor leaders were unsuccessful, and the unions and the 
JVP threatened to strike and disrupt the power supply. 
On May 7, the Prime Minister and several other key 
officials met with the JVP and the Unions and agreed to 
withdraw the Cabinet decision.  The Government team also 
gave a written assurance promising to redraft the reform 
plans after consulting the unions and the JVP.  The 
proposed model contains plans to create subsidiary 
companies within the CEB.  The statement also promised to 
take donor considerations (Japan and ADB) into account. 
In response to these promises, the unions and JVP called 
off their protests.  The Secretary of the CEB Engineers 
Union (CEBU), Mr. Athula Wanniarachchi told Econ FSN that 
his union is agreeable to the new plan, which proposes to 
have 100 percent government-owned subsidiary companies 
under the CEB.  However, he expressed doubt with regard 
to other unions.  He is also skeptical about coming up 
with a plan that could satisfy both donor requirements 
and JVP led union demands. A Japanese Embassy official 
told the visiting IMF delegation that the JVP could live 
with separate companies, but not privatization.  However, 
Japan made clear to the GSL that it would not extend its 
deadline for a proposal beyond June 30. CEB Chairman 
Ananda 
Gunasekera told Econchief that the professional CEB staff 
was largely in favor of the restructuring, but that the 
CEB General Manager and union leaders are pursuing their 
own agendas, fearful of what a leaner CEB staff will mean 
to their power and influence. 
Urgent remedies required 
 
5.  (U) The most important energy sources in Sri Lanka 
are electricity and petroleum.  Supply of both energy 
sources are, to a great extent, controlled by the 
Government-owned CEB and the Ceylon Petroleum Corporation 
(CPC).  Both these suppliers are heavily in debt.  The 
CEB posted a loss of Rs 15 billion (approximately 
USUSD150 million) in 2004 and it is now unable to service 
its short-term debt of Rs 27 billion (USD 270 million). 
CPC's 2004 losses are not known, but its accumulated debt 
was around Rs 23 billion 
(USD230 million) at end of 2004 up from Rs 15 billion 
(USD150 million) in 2003.  The Central Bank, in its 
2004 Annual Report released last week, warned that the 
financial performance of the CEB, CPC and the Sri Lanka 
Railways (which runs the rail system in Sri Lanka) has 
worsened and could threaten macro-economic stability, 
given the strategic importance of the services they 
provide.  One of the main reasons for the current losses 
of the CPC and CEB is the failure of the Government to 
adjust fuel and electricity prices in response to global 
oil price hikes.  On several occasions the Finance 
Minister has said that the price of electricity could be 
reduced after restructuring of the CEB.  However, the 
Government has not been able to convince the unions nor 
the general public of this. 
 
CEB woes mounting 
 
6.  (U) CEB losses are also the result of a heavy 
reliance on "thermal power" (i.e. oil, diesel).  The 
total installed electrical capacity is about 2,358MW with 
a hydro/thermal balance of 54:46.  Electricity demand is 
growing by 10 percent per year.  In 2004, 57 percent of 
the demand was met by thermal power, due to a drought. 
Most of the thermal capacity comes from high-cost diesel 
plants operated by the CEB and Independent Power 
Producers (paid by the CEB).  The reliance on high-cost 
thermal power, and delays in procuring low cost power 
such as coal, have led to generally high electricity 
tariffs.  In addition, despite oil price hikes, the 
electricity tariffs remained unchanged in 2004, leading 
to losses at the CEB.  For these reasons, the Government 
has been contemplating restructuring of the CEB for a 
long time. 
 
7.  (U) Political and union opposition to reforms have 
delayed a number of proposed reforms, including plans to 
procure low cost coal power.  No major steps have been 
taken to procure coal power due to protests by 
environmental groups and local residents, supported by 
religious and other social groups.  There is little 
political will to take on these entrenched interests. 
There have been other delays in the development of new 
generating capacity as well.  A medium sized hydro power 
plant funded by a Japanese loan has been delayed for 
years.  The CEB Engineers unions believe the solution to 
the problem lies in implementing these projects as soon 
as possible, and blame the government for its failure to 
implement these projects in a timely manner.  The unions 
are pressing the Government to accept a Chinese offer 
(Ref B) to build a power plant on concessionary terms 
 
Petroleum -- price hike 
 
8.  (U) Meanwhile, the Government on May 4 took steps to 
increase fuel prices by about 9 percent, the first price 
revision since September 2004.  The price of a liter of 
gasoline was increased by Rs 6 (6 US cents), diesel by Rs 
4 (4 US cents) and kerosene by Rs 3 (3 US cents).  The 
new price of a liter of petrol will be Rs 74 (74 US 
cents), Diesel Rs 46 (46 US cents)and Kerosene, used in 
low-income households for cooking, Rs 28.50 (28 US 
cents). 
 
9.  (SBU) COMMENT:  The CEB's financial situation, with 
its history of delayed payments and increased difficulty 
in obtaining financing, is cause for great concern in a 
country with only one electricity provider. 
Restructuring will be painful for the electric company, 
which employs many times the number of employees 
required.  As seen by the events of last week, the ruling 
coalition, which eyes privatization with suspicion and 
prefers government intervention, will be hard pressed to 
oppose its traditional allies and advocate what could be 
a lean, privatized, and efficient utility.  Yet, the 
government urgently needs to come up with a meaningful 
restructuring plan (disbanding and privatization or 
public-private partnerships) in this vital utility, to 
secure concessionary financing promised by the ADB and 
Japan as well as to convince other donors/lenders that it 
is going to significantly restructure the sector.  The 
ADB and Japan donor programs would pump about Rs 6 
billion (USD600 million) into the electricity sector 
easing the financial situation of the CEB and allowing 
expansion.  It also remains to be seen how the government 
will proceed on the second major problem facing the 
electricity sector -that of procuring low cost power. 
Sri Lanka's future economic growth, and competitiveness 
will largely depend on the government moves in these two 
directions. 
 
LUNSTEAD