Price revisions in CPC and CEB will stabilise economy in the long term

The basic viability of any manufacturing, trading or service organisation depends on the sale of its products or services at a selling price which is higher than its cost price. If a biscuit trader buys a biscuit at Rs. 20, and sells a biscuit at Rs. 15, he will make a gross loss and whatever he may do to manage his business in a satisfactory manner would be of no avail, and he will surely face bankruptcy sooner or later. Therefore, the essential factor in any business is that goods and services must be sold at selling prices that are higher than the cost prices.

This simple truth is equally applicable to state and private sector business enterprises. However, this simple truth seems to have eluded the two giant public sector utilities in Sri Lanka, the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) in recent times. In fact, a careful analysis of the massive losses of these two giant utilities show very clearly that both CPC and CEB are selling their products at much below cost.

According to recent reports, the financial losses of CPC last year was a staggering Rs. 89 billion and the losses of the CEB was a massive Rs. 61 billion. Such losses are bound to be a huge burden on the two utilities, and are highly significant from the point of view of the country's economy. Needless to say, this haemorrhaging has to be stopped in strategic manner, if these two institutions are to recover and fulfil their expected role in the long term economic framework of the country.

To make matters worse, the bulk of the cumulative losses of these two utilities that have been mounting at a frightening pace appear to have been funded by the two large state banks. Fortunately, the state banks' viability has not been at risk, probably as a result of the Government guarantees that has been issued to them, when lending to the two utilities.

Perhaps, in a way, the state banks too, may have been comfortable in advancing these large amounts to the CPC and CEB, since the banks' own balance sheets have expanded from such huge lending and their profit statements boosted by the large sums of interest they were able to charge from the two utilities.

However, this outwardly comfortable, but fundamentally flawed situation must not be allowed to continue unchecked, and this gross imbalance needs to be addressed quickly to ensure the long term viability of the banks and the utilities.

In that context, it must be appreciated that, if these two utilities achieve financial viability, their primary financiers, the two state banks would also become a lot more comfortable in their own cash flows and credit management.

In turn, the resultant improvements in the State banks' financial management would percolate right across the economy, since the improvement in the operations of the two state banks would serve to ease the pressure on the bank credit demand and assist the Central Bank in its monetary policy operations. Those twin outcomes are bound to favourably impact the interest rate regime prevailing in the entire country, and that would, lead to foster a more sustainable growth model as well.

It must, of course, be borne in mind that the initial adjustment in fuel and electricity prices would lead to an additional tension in the general price levels in the country and serve to increase the inflation figures. Nevertheless, the somewhat higher base that is available in the CCPI from March 2013 onwards, (as a result of the increase in prices in March 2012 due to the increase in petrol and diesel prices in March 2012), now provides a useful buffer for a reasonable upward movement in prices. In such circumstances, the Government should consider using this space to make an upward revision in the electricity prices early, particularly as such revision would not have a major impact on the inflation numbers from March 2013 onwards.

With the modest adjustment in petroleum prices that was carried out in February 2013, a reasonable quantum of the CPC losses estimated for 2013 would be reduced. That is certainly a step in the right direction. Together with that adjustment, if the CPC were to charge a more realistic price for the supply of furnace oil to the CEB, (as has been mentioned in the recent past), a further dent is likely to be made in the CPC's losses for the year 2013. At the same time, if a corresponding upward adjustment in the base rates for the different categories of customers together with a modest fuel adjustment charge revision is made by the CEB, such action would serve to transform the CEB too, to a more viable position.

These changes would be vital adjustments in the entire economic structure of the country, and if these changes are implemented in the near future, the economy is likely to shift to a substantially stable position, and add significant long term value to the state sector utilities.

Over the past few years, the Central Bank and the Ministry of Finance have consistently shown that they have the will and the sense to take key economic decisions which are vital for the country's long term sustainability, at the appropriate time. In the current context too, the recent public statements made by the Governor and the Treasury Secretary indicate that these two key institutions are supportive of an adjustment in the electricity and fuel prices to reflect reality.

It is therefore hoped that those adjustments would be expeditiously carried through, thereby placing the economy on a strong and stable platform, so as to enable it to deal with any major external shocks.