The Government has an ambitious target of generating 70 percent of energy from renewable sources by 2030. The remaining 30 percent will be from other sources. However, after 2030, the plan is to work towards a 100 percent. Prof. Sirimal Abeyratne, Head of the Department of Economics at the University of Colombo, shed some light on the topic from an economic perspective and spoke about how Sri Lanka can create positive outcomes, especially with regard to the sale of 40% of shares of Kerawalapitiya Yugadhanavi Power Plant to a US company.
Following are excerpts of the interview:
Q:What are your views on the government targets to convert to renewable energy?
The world is for renewable energy and sustainable practices now. Our industries are connected with the global markets. Greening the industries is an international slogan today. If you are not adhering to international standards, you will lose the markets and competitiveness.
This applies to energy as well since it is a fundamental input to all kinds of products and distribution. Therefore, it is a good move to have this target.
Sri Lanka is an active participant, a signatory to over 40 international movements such as conventions, agreements, treaties and protocols on environmental conservation and so on. We should be working towards honouring our agreements.
But not only to keep to global standards and agreements, but this is also our need as well. Sri Lanka has been classified as one of the biodiversity hotspots in the world. Hotspot means, it should be a location with rich biodiversity with over 1,500 endemic species. A hotspot should have lost 70 percent of habitats. So we qualify for both. We are in a dangerous situation on earth.
If we are targeting 70 percent of renewable energy by 2030, we are doing it in an ad hoc basis because we need to work on an overall set up. We are still polluting and damaging our environment but at the same time we try to achieve renewable energy targets.
This is not going to derive optimal benefits. It should be an overall national policy package which renewable energy is a part of.
Q: When coal power is more cost effective, how can a country like Sri Lanka spend on converting to renewable energy that incurs a high cost?
The impression that coal power is cost effective is just a perception. Coal prices in the world are highly volatile and it goes along with the ups and downs of fuel prices. In the last couple of years, we had very low prices but now it is rising.
However, in general, the idea that coal power is cost effective is only a perception because we are disregarding a lot of other environmentally harmful effects of coal. A recent study, carried out by the Public Utility Council about the Norochcholai Coal Power plant, came to the conclusion that every KWh unit has US$ 0.0391 (about Rs. 8) additional environmental cost that the community has to bear it. Once you consider this, coal would be no different to other powers.
Considering other energy sources such as LNG, coal will also be an expensive source of power generation depending on the quality of input or coal that is used and the technological choices that are made and the scale of operations adopted. Depending on these, the coal power cost may even exceed some other power generating source.
Q: How would Sri Lanka benefit from the sale of 40% of shares of Kerawalapitiya Yugadhanavi Power Plant to a US company?
Energy is an important input and has nationwide importance for development and economic activities as well as consumption at household level. It has a natural monopoly status in terms of the economics of the industry. It also has a huge sunk cost in a sense that you need to sink a huge amount of initial capital to generate it and it is long term too. If you need it in 10 years, you need to start it now. Having considered all this, it has a natural monopoly.
That’s why in many production models in the world, the government has taken it over as a state-owned enterprise to limit that natural monopoly status. That’s why we have the Electricity Board.
But after about over half a century, we are now in a different world of economics whereas those natural monopolies have become state monopolies. They are not different from natural monopolies, rather, they are worse. In some countries, the state monopoly enterprises have far reaching powers and responsibilities to do what they want. Therefore, the world has come up with various models to go beyond the state monopoly situation.
There is also the question of giving a realistic definition to a public enterprise because it is not clear who is the actual owner of a state-owned enterprise? It is a politically attractive statement to say that it is owned by public, but in reality, the public is bearing only the cost and not responsible for operations.
Some of the models have separate regulators. Some countries have gone for partnerships with private companies so that they could introduce private business management practices and limit the inefficiencies. Some models have also gone along the lines of splitting this particular industry into a number of business entities. Sri Lanka also initiated this in the 1980s, that’s how LECO came up. But Sri Lanka did not perform or improve after that. So, it got stuck 30, 40 years ago.
Therefore, it is better to have some other players also in the industry or local market. In that sense, it doesn’t matter whether it is USA or any other company as long as they come under good terms and conditions. It is better to have not only one but a couple of players operating competitively and contributing to the national requirement of energy.
But there is criticism that Sri Lanka is trying to sell its assets to foreigners. Your comments.
It is the way that you term it. You can call it selling assets, and also call it foreign investment in assets. It refers to the same thing. It’s a political question and people can give it different terms to it whichever the political ideals that people nurture.
But it will benefit Sri Lanka because it will increase the number of players in the local market. We’ll have the best international practices in the country. This is something we are lacking; the best practices in management, technological standards, etc. It will give a boost to our electricity board. They can learn new things by working with foreigners and operate competitively. It is good for the industry and country.
Q: What do you think of the government’s current economic choices in bringing the country out of the Covid impact?
Not all current economic problems are due to Covid 19. Covid has only made it visible. But if we examine our economic performance over the last 20 years or so, the basic problem is pre-pandemic rather than pandemic-related. We keep postponing the required reforms.
As a result, over the long term, we were sliding down in our economic performance.
We explain it using our growth performance, export performance and foreign investment in the country. On the other hand, we can explain this downturn by looking at the macro-economic fundamentals, looking at fiscal gaps, increased debt, foreign exchange shortage and related indicators. So, fundamentally the problem starts at a pre-pandemic time.
However, the country cannot progress this way because it cannot have haphazard changes. To recover from the current crisis, we have to go beyond the pre-pandemic status of the economy. This requires taking up of postponed reforms. Now is a good opportunity to undertake reforms, not in an ad hoc and piecemeal basis, but as an overarching national policy.
The fundamental problem of our current economic challenges is the lack of our export growth and foreign direct investment growth. So, export growth requires foreign direct investment because investment comes from two sources.
The first is our own savings and we know the Sri Lankan private sector is too small and the government cannot generate a lot of savings because of budgetary problems. Our economic status is not high on savings.
So the investments coming from domestic savings would not be enough unless it’s a 100-year long development project to become rich. If we think along the same lines, we need accumulate wealth for about hundred years and then become rich.
But, it is not the case today. Other countries are competing to have foreign savings attracted to their countries in terms of foreign direct investment, not the investment coming into the stock market or bond market which are called portfolio investment. But productive investment coming to buy our assets and to make production of goods and services to export.
Q: How would you compare Sri Lanka with the region?
Sri Lanka has been attracting less than USD 1 billion foreign investment a year. Our neighbours attract more foreign investments. India has become one of the leading economies in the world attracting foreign investment now. It has received USD 50 billion in 2019, as some argue, because it has the advantage of a bigger domestic market.
In spite of being a smaller country, Singapore attracted USD 92 billion whereas Sri Lanka failed to secure even USD 1 billion. This is because the investors don’t trust the business and political environment of the country.
These are the issues we need to sort out and make the country a business-friendly investment centre in the region. Those choices can be made right now as a part of our policy reform process. Then Sri Lanka will achieve economic growth and export growth beyond the pandemic, ensuring the developed country status in the next 20 years, rather than waiting for a hundred years. Many countries have done it in 20 – 25 years. Sri Lanka could be one of them.