World Bank, ADB and JICA write to Energy Minister; raise concerns over Electricity Act amendments

The Asian Development Bank (ADB), the Japan International Cooperation Agency (JICA), and the World Bank have written to Sri Lanka’s Energy Minister regarding several key issues concerning the Electricity Act 2024 Amendments published in the Gazette recently. 

The World Bank, ADB and JICA have been the major development partners in the power sector of Sri Lanka. The three institutions coordinate closely on key policy issues, investments, and technical assistance.

In a letter addressed to Sri Lanka’s Minister of Energy Eng. Kumara Jayakody recently, the institutions thanked the Ministry of Energy and the Power Sector Reforms Secretariat for their continued engagement over the past several months on this topic. 

However, they highlight four issues in the version of the Amendments to the Electricity Act 2024 published in the Gazette and being proposed to Parliament for consideration, which they believe impede the original intent and spirit of the Act regarding sector efficiency, good governance, and financial sustainability, all with the ultimate objective of ensuring a high quality of service to consumers at affordable prices. 

“We share these comments in the spirit of supporting the Government of Sri Lanka in the smooth implementation of the final version of the Act and ensuring a strong energy sector for the future,” said the letter, signed by the Country Manager of the World Bank and IFC, ADB Country Director and JICA’s Chief Representative of Sri Lanka Office. 

The issues highlighted in the letter are as follows: 

Permanent Government Ownership 

Section 17 of the principal Act, subsection 2 is amended with entities denoted as (a), (e), (f), (g), and (h)(ii) will remain “permanently” owned by the Government (through Secretary to the Treasury). The rationale for maintaining 100% Government ownership for the NSO, NTNSP, and Pension Liabilities Company is understood. However, legislating permanent 100% Government ownership in the Act, will increase the burden on the state, limit any private investment or opportunities into the Generation Company and Distribution Company, and only hinder the Government’s options for development in a sector with large investment needs. 

National Transmission Network Service Provider (NTNSP) 

Clause 20, subclause 3: The preliminary transfer plan includes LTL Holdings under the NTNSP. LTL Holdings owns and operates over 1GW of generation assets in Sri Lanka and abroad. Additionally, LTL has multiple other businesses including transmission and distribution projects, transformer manufacturing and other engineering projects. In the same clause, the preliminary transfer plan also includes Sri Lanka Energies under the NTNSP. Sri Lanka Energies has approximately 15 MW of mini-hydro plants, and other businesses including manufacturing meter components. 

Having both companies under NTNSP would in turn create a generation company owning approximately 20% of Sri Lanka’s generation assets as well as multiple other businesses, come under the responsibility of the NTNSP. Given the urgent need to upgrade the transmission network and the renewable energy integration needs, bundling businesses outside the core function of NTNSP will likely result in a deterioration in the operations of those businesses and a distraction from the core functions of NTNSP. It will also detract from the principal objective of separating the core functions of the CEB, in this case transmission vs generation, and introducing the necessary transparency and removal of conflicts of interest, which were one of the cornerstones of the reforms.

Distribution Company 

Clause 20, subclause 4: The preliminary transfer plan assumes the Distribution Company will assume “the assets, liabilities and functions” of LECO. LECO has been operating as an independent company from CEB distribution divisions and has adopted operational efficiencies and innovations for its customers and employees. This proposal will imply that a distribution company/licensee is going to fully absorb another distribution company/licensee, without considering the commercial, operational and legal ramifications. 

The creation of a large NTNSP and Distribution Company, combined with the removal of restrictions on a single entity or Government of Sri Lanka acquiring multiple unbundled entities (clause 15, subclause 3) leaves an opening to reverse the unbundling, and return to a system of operational inefficiencies, conflicts of interests, and poor governance, all at a cost to the consumer.

Role of the regulator in tariff setting 

Section 29, subsection 3 is amended with the following language: “by the substitution for the words “in accordance with the national tariff policy”, of the words “in consultation with the Ministry of Finance” rather than “after consultation with Ministry of Finance”. We have noted in previous communications that while this was accepted as a reasonable compromise in theory, we want to reiterate that this could pose challenges when trying to implement the act as this language is unclear and open to interpretation and/or legal challenge since there is ambiguity on who has final authority and accountability on tariff setting. 

These changes could undermine the overarching objectives of the Electricity Act and the commitments made by the Government under the Asian Development Bank’s Policy-based Loan and World Bank’s Development Policy Operation. It will also weaken attractiveness of Sri Lanka for investors, contrary to the Government’s intentions. We urge the Government to consider the points stated in this letter and amend the clauses to ensure they align with the core objectives of the Electricity Act—good governance, competitive procurement, regulatory independence, and financial sustainability.