Power play

Thursday, 21 August 2014 00:00 - - {{hitsCtrl.values.hits}}

Independent power producers to get short-term contracts based on price
No impact on growth by drought
Scope for Government debt buys between SL and India, says likely to do same with other countries

By Uditha Jayasinghe Independent Power Producers (IPP) in Sri Lanka could negotiate for short-term contracts with the Ceylon Electricity Board (CEB) when their current agreements expire, top officials said yesterday, insisting it was necessary to promote a more sustainable energy sector. Several contracts signed between the CEB and IPP are ending in the coming months, creating speculation over what would be done about the plants. IPPs are run by several local firms including Aitken Spence and Hemas Power. Some have foreign investors and even lending agencies as shareholders. Central Bank Governor Ajith Nivaard Cabraal during a meeting with the Foreign Correspondents Asso-ciation (FCA) defended restructuring of the agreements. “The new agreements will be largely based on price and it is possible for these private producers to reduce costs now as they have regained their capital investment and paid off any loans. Depending on the price of electricity, the agreements could be about three to five years,” he said. Central Bank Deputy Governor Dr. Nandalal Weerasinghe who chairs the committee dealing with the IPPs insisted even with the new agreements most IPPs will be kept on standby mode, to be used during peak hours or droughts, as the country would have sufficient power once Norochcholai and the proposed Sampur power plants are in full swing. He stressed the CEB needed to reduce its debts and therefore had been instructed to refrain from entering into power purchase agreements more expensive than what it is already bound to. However, contracts with gas turbines would be maintained as the plants are in good condition and is part of the CEB’s long term energy plan for the country. “Part of the considerable amount of money being paid to private power producers could be used to ensure that electricity prices are maintained for the benefit of the consumer. Just because the situation has improved, it does not mean costs can be reduced instantly. During past droughts the CEB had to absorb losses for long periods of time. This is also an attempt to reduce Ceylon Petroleum Corporation (CPC) debts,” Cabraal noted. Over the past decade, the private sector’s power contribution has continued to rise, with the sector fulfilling around 43% of the country’s power requirements during 2011 compared to less than 10% in 2000. The country’s IPP sector comprised 115 producers as at end-December 2011, with 90 players focusing on mini-hydro power. Hydro power is also not likely to be affected by the prevailing drought, Cabraal remarked, adding the Government had no plans to downgrade growth projections. “It is unlikely the drought will affect growth substantially as agriculture only makes up about 10% of GDP. Generally when we make predictions we factor in some level of instability,” he went on to say, assuring 7.8% growth. Discussing India’s investment of a record $ 73 billion in the United States Government bonds in June, Cabraal recalled the agreement between the Central Banks of India and Sri Lanka to buy up to the equivalent of $ 500 million in each other’s Government debt to diversify their currency reserves, and an option. “That (agreement) was the first step. We are likely to do that with other countries. Our international operations division will look into this… The door is open.” Foreign investors can only hold up to 12.5% of total Government securities. They have already bought up to 12% or Rs. 469.5 billion ($ 3.6 billion) worth Government securities as of 16 July but the Governor assured special provisions could be made for India.

Central Bank defends its US public relations program

Central Bank yesterday defended their use of international public relations companies to lobby for the promotion of Sri Lanka’s reputation. Releasing a statement the Central Bank noted it launched a robust Communication Program in the USA with the engagement of the Thompson Advisory Group LLC (TAG), from March 2013 to June 2014, and the subsequent engagement of the Liberty International Group LLC from August 2014 onwards. “The Communication Program has been fashioned to create and maintain a conducive political and economic environment in the USA to enhance Sri Lanka’s long-term political and economic aspirations, and to develop a comprehensive information platform where decision makers in the USA would receive clear and accurate information about conditions in Sri Lanka so that it would serve to attract a higher volume of private sector investments,” the statement said. The Communication Program of the Central Bank has been devised in accordance with the Monetary Law Act’s mandatory objectives of realizing economic and price stability and financial system stability, as well as encouraging and promoting the development of productive resources of Sri Lanka. “Over the past several years, after the end of the conflict, the Central Bank has observed with deep concern, the massive and well funded adverse publicity generated by an organized group of the diaspora, certain sections of the local and international media, and a few local and international non-governmental organisations, which, if left unchecked and unchallenged, could have the potential to erode the confidence among international investors and thereby adversely affect the stability of the country’s economy,” it added. In that background, the Monetary Board of the Central Bank decided to engage the services of a professional agency to assist the Central Bank to convey an accurate and realistic position regarding the political and economic conditions in Sri Lanka. Such effort was considered all the more important since the U.S. investments in Sri Lanka in terms of Government Securities, International Sovereign Bonds, Portfolio Investments, and Direct Investments, are substantial. The robust communication efforts carried out over the past several months have been helpful to provide a more balanced understanding of the Sri Lankan political and economic conditions among a considerable number of top level US leaders including senators and congressmen, think tanks, trade associations, and the US general public, the statement emphasized. As a result, satisfactory results are being achieved, with considerable investments being made by several U.S. investors, particularly in the banking sector, while a more balanced view on Sri Lanka is also being taken by a greater number of US leaders, intellectuals and citizens.

Short-term rates seem to be bottoming out

Reuters: Sri Lanka’s short term interest rates seems to be bottoming out after falling steeply for multi-year lows in line with the key policy rates, and there is little scope for long-term lending rates to come down, the Central Bank Chief said on Wednesday. The Central Bank rejected all bids for short term 91-day Treasury bills at an auction on Wednesday after their yield fell to multi-year low of 6.19%. “It’s an indication that the sharp drop that we have seen in the past several months is now seeming to be bottoming out and it seems that it is stable at around those levels,” Governor Ajith Nivard Cabraal told a Foreign Correspondents’ Forum. The Central Bank has maintained the key monetary policy rates at multi-year lows for seven straight months through August, after lowering repurchase and reverse repurchase by 125 bps and 175 bps between December 2012 and January 2014. “There is little bit more scope for long term lending rates coming down,” Cabraal said, without elaborating whether the Central Bank would consider another rate cut in the near future. He also said the Central Bank might have a balance-of-payments surplus a little higher than the expected target of $ 1.51 b for 2014.