The Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) made a joint loss of Rs. 113.12 billion in 2011 missing a key combined breakeven target set by the International Monetary Fund (IMF) as the dependence on oil grew during the year.
While the IMF earlier this year said it was willing to overlook this structural benchmark as the country had no control over world oil prices, the Treasury highlights several governance issues the two institutions need to deal with in order to affect a complete turnaround, a responsibility both the CEB and CPC failed in.
Electricity demand grew by 8.5 percent in 2011 and 90 percent of the country’s households were covered by the national grid.
The CEB had to depend on high-cost thermal power plants to generate 50 percent of last year’s electricity requirement which resulted in the CEB making a Rs. 19.26 billion loss as against a profit of Rs. 4.8 billion the previous year. A fuel adjustment charge is expected to decrease the CEB’s loss to Rs. 49 billion in 2012, the 2011 Annual Report of Ministry of Finance and Planning showed.
"The capital investment in the development of generation, transmission and distribution systems during 2012-2020 is estimated to cost in excess of Rs. 1,000 billion. Therefore it is necessary that CEB begins a phase of generating profits to meet its medium term needs. At the same time CEB is encouraged to explore other avenues including renewable energy as well as private investments which will have a positive impact on the overall energy strategy of the country," the Treasury said.
"The COPE report 2011 highlights the need for CEB to revamp its structure adopting best corporate practices, which will increase its accountability to all stakeholders while also improving its efficiency and effectiveness. In this regard CEB needs to place special emphasis on procurements, human resource management and a viable business strategy, if CEB is to become an organization that possesses the ability to respond to the changing needs of the economy and the society," it said.
The CEB generated electricity at an average cost of Rs. 15.59 per unit last year (Rs. 22.86 percent unit for thermal power generation) with domestic consumers enjoying a subsidy of Rs. 8.99 per unit. The recently introduced fuel adjustment charge notwithstanding, consumers would enjoy a subsidy of Rs. 4.76 per unit this year too, the Treasury points out.
Meanwhile, the CPC incurred a loss of Rs. 93.86 billion in 2011, compared to a loss of Rs. 26.92 billion the previous year, largely due to increasing global prices and the continued sale of domestic fuels below cost.
CPC financed its imports amounting to US$ 3.7 billion in 2011 with borrowings from Bank of Ceylon and People’s Bank totaling Rs. 328 billion.
With Brent crude oil prices increasing to more than US$ 112/bbl in 2012, the CPC revised the prices of Octane 90/95, Diesel/Super Diesel, Kerosene, Heavy Fuel (including low Sulpher Heavy Fuel) and Napththa by almost 30 percent with effect from February 2012.
"The CPC has been incurring significant losses by subsidizing Kerosene since 2005. However with the country already achieving electrification of almost 90 percent in the household sector in 2011 and 100 percent by the end of 2012, CPC revised Kerosene prices by almost 50 percent to recover its losses. The government has decided to subsidize the 355,000 families that have no access to electricity and fisherman who use Kerosene," the Treasury said.
"However, although price of Heavy Fuel increased by almost 50 percent, it is still subsidized by almost 40 percent, in order to make available electricity at affordable prices. The estimated loss from these subsidies to CPC is partly covered from higher prices of Petrol.
"Government assistance to the CPC continued in 2011, by way of Treasury Guarantees amounting to Rs. 11,389 million which facilitates CPC’s funding from external sources. With the aim of strengthening CPC’s balance sheet, the Treasury issued a tradable bond in January 2012, to the value of Rs.60 billion in lieu of the outstanding dues as at the end of 2010 to the CPC from CEB amounting to Rs.50.5 billion and other government agencies," the Treasury said.
Like the CEB, the CPC too is facing governance and management issues.
"While recognizing the challenges faced, CPC has failed to restructure its management and business model to perform its responsibilities. The lack of a clear strategy on procurements, pricing and, weak financial and operational systems has resulted in the sub optimal utilization of its resources and deterioration in its performance. The COPE too, highlighted lapses in the governance structure of CPC which will have to be addressed immediately.
"It is also necessary to strengthen the Board of Management, audit committees, procurement systems, financial management as well as employing professionals into key positions to manage this single largest enterprise in the country, which is accountable to manage almost a US$ 5 billion turnover of a global commodity," the Treasury said.