Electricity Hikes and the Darkening Economy


By Ahilan Kadirgamar

At the heart of the debate about the electricity price hikes are questions about state services, class inequality, redistribution and the economic transformation underway in Sri Lanka. Is electricity a basic need for the broader population and is it an essential social infrastructure that is the state’s responsibility? How is this infrastructure to be built, expanded and sustained? Who is to pay for it? In this article about electricity hikes - perhaps the most important economic move by the Government since the major fuel price hikes in February 2012 - I address the question as to why these price hikes are taking place at the current moment as well as the impact of the broader economic transformation underway.

The electricity hikes, which were to increase Ceylon Electricity Board (CEB) revenues by 27% with some consumers facing over a 100% increase in their electricity bill, have been dealt with in a number of articles over the weeks. Many of these commentators focused on inefficiency and corruption tied to the CEB and the Government even as they recognised that the losses by the CEB began well before the Rajapaksa Government took over in 2005. Others have pointed to the deficiency of cost efficient electricity generating infrastructures. Particularly, the failure to expand the hydroelectricity plants constructed decades ago and alternatives to expensive oil driven thermal generation through investment in coal power plants. Indeed, many economists have rightly identified the major financial burden of oil imports necessary for thermal generation which has created this crisis for CEB and become a drain on state finances. Other commentaries and protests have correctly focused on how these electricity hikes are going to affect the poorer sections of society creating an additional burden to have minimal light during the darker hours of the day. While such analyses and protests do capture many aspects of the drastic electricity hikes, I would like to address the broader economic transformation unleashed by the Rajapaska regime which has driven this sudden and shocking price hike. Furthermore, I would argue that the reduction of the debate on electricity hikes to the realm of what is realistically possible for CEB at the moment without a critique of the broader neoliberal development policies, will both absolve the actors responsible for this crisis as well as forestall any sustainable resolution of both electricity and economic problems facing the country.

Consumption, Basic Needs and Class

While some economists argue that electricity is a mere commodity that should be sold and consumed as per the whims of the market, it is in fact a need. Indeed, our needs are created by our historical social context. For example, for earlier generations firewood for cooking was a need which they could find in their own backyard or in the neighbourhood. However, with economic changes including urbanisation and the intensive use of rural lands, in many villages, households now spend thousands of rupees a month to purchase firewood as a commodity. This does not change the fact that firewood, kerosene oil or gas depending on social context is a basic human need to sustain life. Similarly, the social and economic life of the rural and urban poor has also been changing where electricity is necessary for a restful evening after a long working day or for their children to study at night. Thus price hikes can affect the bare minimum everday life throwing sections of society deeper into subaltern existence. Furthermore, there are also sections of the subaltern classes - who due to lack of access to legal title, proper housing or dwellings in slums and estates - continue to be denied this basic need of electricity. Their harrowing predicament cannot be addressed here and requires another article on its own.

In any event, it is the national debate and protests that led the President to back track on electricity hikes for those using less than sixty units in his May Day speech. In recent years, electrification at minimal costs to marginalised communities, including remote villages without electricity in the past, has become a consistent electoral demand. Indeed, the shift in the political economy of state services, including education and healthcare, particularly after the open economy reforms of 1977, has led to the expansion of services but with an attendant deterioration in quality and a tendency to transfer the costs of services to citizens. Nevertheless, this downward spiral has not been without protest, and it is the fear of mass agitations and a major political swing against the Rajapaksa Government that led to the May Day revision of the electricity hikes.

There is a class character to electricity consumption beyond its value as a basic need. It is not the rural electrification projects that led to the major increase in electricity production costs. According to the Energy Forum, which has made some excellent interventions: "Cost of generation: of a hydro power unit is about Rs. 0.50; of a coal unit is about Rs. 9; of a renewable energy unit is about Rs. 18; of a Heavy Fuel Oil unit is about Rs 20 and of a Diesel unit is between Rs. 30 and 80. … The maximum unit cost of a delivered unit of hydro unit (considering capital, O&M costs, transmission and distribution costs and losses) is only about Rs. 4.50 however the minimum unit price they pay for electricity at the 2012 rates is Rs. 4.75." Furthermore, the same document explains that the bottom 22% of the domestic electricity users who use less than 30 units only consume 6% and the bottom 49% who use less than 60 units only consume 25% of total domestic electricity consumption.

The demand for greater electricity generation and thus expensive oil driven thermal generation is to a large extent propelled by the process of industrialisation and urbanisation. Indeed, the promotion of electricity consuming industries and wealthy households encouraged to consume electrical goods without policies to augment the supply of affordable electricity is at the crux of the problem. In this context, the poor would be asked to pay for the infrastructure necessary for the rich if their electricity charges increased to meet the additional demand for electricity. In other words, hydro power plants built decades ago only require minimal maintenance costs as the capital invested in them has been depreciated, and those hydro power plants are more than adequate to meet electrification as a basic need for households. It is electricity for luxurious consumption and profit seeking businesses that have increased demand for electricity leading to large scale thermal production over the last two decades.

Economic Priorities of the Regime

During the last years of the war the Rajapaksa regime assured the public of a post-war economic dividend, which is yet to be realised. Instead, four years after the war, the cost of living continues to rise, while the quality of state services decline due to lack of state investment with signs of further privatisation and cuts to social welfare. Thus the electricity hikes and the protests against them should be analysed in the context of the Rajapaksa regime’s post-war economic priorities.

At the end of the war the President announced that "development" was the solution to all of Sri Lanka’s woes. This problematic assertion took some time to gain material form. It is now amply clear that by "development" is meant the building of highways, ports, hotels and airports. There have also been the show projects such as Nelum Pokuna, Hambantota Port, cricket stadiums, etc. which have sunk much capital with little returns. This raises the questions about the benefits of such "development" to broader society. Who do highways serve, when many villages lack proper roads to their homes?

The economic priorities in Sri Lanka now are focused on infrastructure development are shaped by the processes of financialisation and urbanisation. Indeed, these economic policies aggravate uneven development, whereby according to the CEB Statistical Digest for 2011, Colombo City alone consumes 12.4% and the Western Province 44.2% of national electricity production. The World Bank has been promoting such urbanisation, uneven development and infrastructures for the wealthy and businesses for quite some time in Sri Lanka. Thus at the heart of the debate about electricity hikes are questions about our vision of development, the economic geography of our country and the class character of our societies.

Crisis, Financialisation and Redistribution

This crisis of electricity production and CEB losses have been going on now for decades. Then why did this crisis lead to the Rajapaksa regime taking this drastic move at the present juncture? The answer lies in pressures tied to the neoliberal economic transformation that the Rajapaksa regime has been accelerating; it is increasingly bound to financialisation and global finance capital. The global financial establishment brought Sri Lanka the US$ 2.6 billion IMF Standby Facility of 2009, over US$ 4 billion in sovereign bond sales and flows of billions of dollars in speculative investments into the stock market, domestic financial institutions and real estate. But this very establishment also demands guarantees that the government will repay the global financiers.

At the centre of ensuring such fiscal prudence including a reduction of the budget deficit is the IMF pushing for domestic reforms. The IMF is thus the watchdog whose report card on Sri Lanka is amplified by global financial rating agencies providing further signals to global investors ready to speculate in the "emerging markets".

Earlier this year, when a second IMF agreement with the Government failed, it became clear that next on the agenda will be the losses tied to the state enterprises. In recent weeks the IMF has not only congratulated the Government on the electricity hikes but also offered its assistance to restructure CEB and other state enterprises. On July 16, 2009, in the Letter of Intent to the IMF for the Standby Arrangement co-signed by the Finance Ministry and the Central Bank, the following aims were mentioned: "reduce the budget deficit to 5 percent in 2011 … ensure that the Ceylon Electricity Board (CEB) and the Ceylon Petroleum Corporation (CPC) break even by end-2011." Furthermore, the letter legitimised the Government’s intentions by referring to the CEB and past prices hikes: "we raised tariffs by 35 percent in March 2008..." Thus the current price hikes are also a step towards further engagement with the IMF and acceleration of neoliberal reforms. Given the Rajapaksa regime’s fear of protests against privatisation it is doing the next best neoliberal solution of transferring costs to broader society. However, addressing the losses of state enterprises like the CEB in the immediate term with a view towards inviting global finance will only further encourage the bubble economy in finance and real estate leading to broader economic crisis in the future.

The question could be asked, what is the alternative? Who is to pay for the increasing demand for electricity even if they agree that up to a point electricity is a basic need? This is all the more relevant given that state revenues have been steadily falling as a fraction of the GDP in Sri Lanka, despite the rosy commentaries of the expanding economy. There is no option but to bring back ideas of redistribution and equality to change the structure of our economy. The financialised bubble economy which gives the illusion of prosperity - where the financial elite make a killing and broader sections of society are dispossessed - needs to be challenged and the process of financialisation reversed. If the crisis of electricity prices is an issue for larger sections to mobilise, their demand should be about redistribution starting with heavy taxation of the wealthy, including the financial sector and financial transactions. Such mobilisations should hold the Rajapaksa regime responsible for pushing Lankan society into a bubble economy that is augmenting the wealth and power of an oligarchic elite and dispossessing broader society. Unless this neoliberal economic transformation is challenged, basic services whether they be education, health or electricity are all heading toward a dark future.

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