The Ceylon Electricity Board is, I believe, the largest single engineering entity in the country in terms of professional engineers employed and asset capitalisation. It is the guardian of a vital public good, electricity, and one whose delivery involves the most sophisticated technological challenge of all of Lanka’s engineering and industrial activities. I had the honour to deliver the 2009 Wimalasurendra Memorial Lecture at the Institution of Engineers (Sri Lanka) on 17 September and I will devote my columns this week and the next to edited and collated extracts chosen to be of public interest. The theme of the material I have chosen for these two pieces (the lecture itself went beyond these themes to deal with environmental and social questions) is reform of the electricity supply industry in the light of the sector’s own problems and worldwide advances in this industry.

The landmark event in the history of the electricity supply industry in Sri Lanka was the formation of the Ceylon Electricity Board in 1969. The assets and functions of the Department of Government Electrical Undertakings were transferred to the CEB which was charged with all the technical and commercial responsibilities of generation, transmission, distribution and supply. There were, however, more fundamental motives for setting up the CEB. First and most important was to establish an entity which could borrow monies and enter into contracts with the World Bank and other foreign organisations. This was crucial in order to finance the large hydro projects which were in the pipeline. Section 42 of the CEB Act No. 17 of 1969 provides watertight guarantees protecting the interests of the lender and grants exception from taxes and stamp duties. The legal authority to enter into contracts and to buy electricity in bulk has been a cornerstone of CEB activity in the last 40 years.

A second function devolved on the CEB was to fix charges and tariffs, and as stated in Section 38 of the Act, to ensure that revenue was equal to outgoings. In recent years this requirement has been openly violated in order to satisfy the populist aspirations of successive governments. A third most laudable objective was that it was imagined in the early days that the CEB would function independently of ministerial control and political interference, and would adhere to high professional standards of management free from the burdensome constraints of government administrative and financial regulations. Section 8 of the Act in fact strictly limits the powers of the Minister to three aspects - general and specific directives in the national interest, calling for information, accounts, returns and the like, and thirdly to take steps to investigate the affairs of the Board when the necessity arises.

There is no provision of the CEB Act which has been more flagrantly violated than this. I can speak from some personal experience since I was on its Board of Directors (at the tender age of 29) from 1970 to 1974. The Board simply had no independence whatever; it was a creature of the Ministry and I was thankful to escape from reappointment for a second term. And still, in those days, political interference was nowhere near as bad as it was to become in later decades. It can be asserted with little fear of contradiction that of the three basic objectives envisaged in the creation of the CEB, only the first has come to fruition.

We need to frankly address the question why the independence of the CEB from government and political control could not be ensured. To my mind, in order of priority there are four reasons. First, the CEB was too big, too much a centrepiece of national infrastructure policy, its funding too large and too heavily underwritten by government, that it was unrealistic to expect that it could escape the heavy hand of state intrusion. In all developing countries the state is the driver of infrastructure development and the big spender and its writ runs large in the formative years of any vital national infrastructure industry.

The second reason is that the Republican Constitution of 1972 decreed that the political establishment would oversee the public service, thus disabling the independence of the latter from politics; the CEB was caught up in this shift of culture. A third reason that has been suggested is that the simple love of graft and the opportunities for colossal enrichment that multi-billion rupee projects provided was simply too much of a temptation for the political establishment to keep its hands off. Finally it is suggested that the absence of an independent regulator allowed the CEB to be decision maker, regulator producer and seller and that this arrangement became self-destructive.

Political interference and graft have always been closely and inextricably entwined. The social challenge facing the sector is this questionable ethos. The last fifty or so years have been marked by some spectacular successes, the Kelani and Mahaveli projects and the extension of service to 83% of households, for example. But the failures have been of disastrous proportions too. It is not just that we are bleeding dollars into oil and gas wells, but also that a subculture of politicisation and corruption has taken hold.

From government department days, through the early years of the CEB when big hydro power projects were being set up, finally to the great days of the Mahaveli Scheme under the administration of the Mahaveli Development Authority but requiring liaison with the CEB, these were the halcyon days of planned development. Multilateral funding agencies, foreign consultants, and local engineers in the CEB and Mahaveli Authority produced multi-volume tomes detailing future system development profiles, especially generation expansion programmes, over 20 and 30 year horizons. As a member of the CEB Board I had the opportunity to interact with the bright young minds of the day and share in the excitement of planning this future on a majestic scale.

But two developments brought this phase to a close - first the end of the grand hydro era with the completion of the Mahaveli projects did not leave much to do in terms of sequencing a generation development strategy of the older type. This is not entirely true; from early days the importance of incorporating coal power was understood and worked into the plans but the obstacles were many. This also threw into some disarray the idea of hydro-thermal long term planning to properly sequence thermal additions, as had been done with Kelanitissa, instead of the disorganised and corrupt rush to barges and diesel. The completion of the large hydro projects also reduced the pressure of demand on supply for a period and the urgency to plan for tomorrow was put off for the day after tomorrow.

The second major change that signalled the demise of long-term planning was the global and local turn to market economics. Multilateral agencies (IMF, IBRD, ADB) throughout the world began to sing a new tune after the commencement of the Regan-Thatcher era in the late 1970s. The new tune was; ‘Go to the private sector, open up your economy to international private capital, let investors come in and build your infrastructure projects in a competitive market, let them charge for the goods at unsubsidised prices’. Even the CEB was established in 1969 on IBRD advice.

This ‘market knows best’ philosophy survived a full three decades in the global economy until it collapsed in the Great Crash of 2008. I will not at this point indulge in my favourite pastime of critiquing neo-liberal economics, nor will I deny that this period taught some valuable lessons about competition and paying due attention to efficient resource allocation. I am simply making the point that the international environment, after the late 1970s, was no longer conducive to business as usual planned electricity industry growth.

This global transformation was matched locally by a sharp shift of policy within the country from the so-called mixed economy with a significant role for state enterprises that prevailed up to 1975 if not 1977, to an open to foreign and local investor, privatisation oriented policy that turned its back on state economic involvement. The Mahaveli was the single exception because it was too large to manage except under the aegis of the state. These global and local changes lubricated the transition from a planned power system expansion tradition, to distorted market driven practices.

It is not that market driven competitive power system expansion is inherently bad and bound to end in a debacle. The disastrous delay in introducing coal power was not a failure of market economics but caused by political factors. The same could be said of the panic and rush to oil and gas - the market was never given a chance. Had it been managed carefully, without jettisoning the role of the state sector which is vital in crucial and expensive infrastructure sectors like electric power, then it could have made useful contributions. Had it been managed without monumental graft, public anger at private power would not have run so deep. Sri Lanka, however, failed on both counts and the country haemorrhages hundreds of millions of dollars each year paying for oil and gas to keep our turbines in motion. We now await the arrival of king-coal to stem the haemorrhage.

The next decade will be the decade of coal; that is a foregone conclusion. The economic challenge is what next after that? I believe that it is urgently necessary to begin to look, yes start looking right now, at innovative alternatives. Small nuclear plant in unit sizes that our system can by then absorb, and the outcome of Obama’s $50 billion investment in high technology renewable options will be available to us in the 2020s. The economic challenge will be that by then, having become accustomed to relatively cheap coal power, can we resist the temptation, the addiction, to keep going with coal for another decade? That would be a crucial error we must avoid except if clean-coal technologies (gasification, capture and sequestration) come to the rescue; but then at what price?

But larger than the issue of fuel source diversification is the reorganisation of the whole electricity supply industry. I will venture into some of these aspects next week.