Justification for the Birth of LECO

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This is the second in a series comprising four parts on Lanka Electricity Company (Pvt.) Ltd., It is based on a report titled, “The Story of Lanka Electricity Company (Pvt) Limited (LECO)” and released on ADB’s website on 18 July 2022. The first part, published last week, revolved round the Birth of LECO. Part two: “Justification for the Birth of LECO,” Part three: ‘Privatisation of LECO Stumped’ and the fourth and final part, ‘CEB Falls Behind LECO in Efficiency’.

The President of the country in 1982, J.R. Jayewardene, who was also the Power and Energy Minister, suggested that Ceylon Electricity Board (CEB), the national generation, transmission and distribution utility should take over the distribution networks then managed by local councils, Asian Development Bank (ADB) in a document titled, “The Story of Lanka Electricity Company (Pvt) Limited (LECO) and released on its website on 18 July 2022 stated.

Public complaints about the poor quality of electricity supply in council areas were too many for the President to ignore. Besides, much of the country’s social and economic activities occurred within these council-served areas. Finally, the President appointed a committee in 1982 to recommend a suitable action plan to solve many problems faced by customers.

But CEB viewed that such staff, joining from councils would spoil the discipline of CEB’s own staff. CEB was alarmed with the poor financial status of the council networks, poor revenue collection and network losses of almost 50 per cent compared to CEB’s own transmission and distribution losses of only about 17 per cent.

Meanwhile, the above committee which was chaired by Power and Energy Ministry Secretary K. K. Y. W. Perera comprised four other members including GM, CEB. H. S. Subasinghe. The committee, with the available data of 219 council-owned networks serving 230,000 customers analysed a number of options, ranging from handing over the services to CEB to the completion of privatisation.

The committee submitted its recommendation in November 1982, to form a company with shareholding from CEB, Urban Development Authority (UDA) and councils. However, there was significant resistance from the councils to this move. With resistance mounting, the Government invited all the council chairperson/s to a seminar in Colombo.

Officials explained the need for reforms and that a company could serve the purpose. The councils would be shareholders by virtue of their electrical assets handed over to the company. Jayewardene attended the lunch with the chairperson/s of councils and expressed his determination to proceed. By the end of the seminar, all chairperson/s, in principle, agreed with the proposal.

The Cabinet approved the formation of an electricity distribution company. Consequently, LECO was formally incorporated on 19 September 1983 under the provisions of the Companies Act No. 17 of 1982.

LECO swiftly commenced operations in 1983 itself, initially by setting up an office in a rented house in Colombo, with a limited staff. LECO handpicked and hired engineers with local and international experience in power distribution to lead planning, projects and operations. There was a transparent procedure to hire staff. Although LECO was owned indirectly by the Government, most importantly, it was not required to abide by the practices followed by other mainstream Government agencies in recruitment, human resource management and development.

 LECO believed in policies and principles of distribution planning and meticulously practised them. LECO knew exactly to which medium voltage feeder, distribution transformer and low-voltage line each customer was connected to. Load-flow studies were conducted for the entire distribution network at a time when the belief was such analyses were required only in transmission planning.

Any successful company must efficiently collect their revenue to remain in business and curb losses. An innovation brought in by LECO from its inception was instant billing. Immediately after reading a meter, the bill was produced and delivered to the customer’s doorstep. By then, although payment at banks was allowed, customers had to fill forms or slips. LECO’s bill included a section to be used as a paying-in slip which did not require the customer to fill up additional information. Additionally, LECO provided the option for customers to pay their bills at local shops. LECO was instrumental in minimising commercial losses. A meter was fixed at the low-voltage end of each distribution transformer. Every transformer was metered, and the readings were checked against aggregate customer bills, on a monthly basis. Any discrepancy indicative of theft or metering problems received immediate attention.

Traditions

The formation of LECO broke away the traditions in utility engineering and management and showed that even a Government-owned entity can be efficient when the right leadership and freedom to make decisions are granted. The people—from chairman/men down to the line crew—were LECO’s assets, who facilitated this transformation.

The authorised capital of the company was Rs 1,200 million divided into 120 million shares of Rs10 each. There were two types of shares: 75 per cent of the total shares were type A shares with voting rights, and the remaining 25 per cent shares were type B shares without voting rights.  As a private company, the number of members was limited to 50 and shares were not issued to the public. CEB was to hold a minimum of 51 per cent type A shares. The shares issued to the councils that opted to receive shares, equivalent to the value of assets transferred, were limited to type B shares, without voting rights.

In accordance with the provisions of the then Electricity Act No. 19 of 1950, the licence to supply electricity was issued to LECO on 25 May 1984. The licence was in force for a period of five years and provided the authority to supply electricity anywhere in the country, without restricting to a specific geographic area, reflecting the planned expansion of the LECO service area. The voltage and the system of supply as authorised in the licence were 33 kV, 11 kV, 400/230 V, 50 hertz, alternating current of 2, 3, or 4 wire-system.

LECO had a nucleus of enthusiastic corporate and branch staff, but it did not possess the managerial or organisational resources necessary to service about 50,000 customers it planned to absorb in the first phase of its development.

To rehabilitate and expand the rundown and overloaded council networks, the company needed to quickly set up and operate an extremely dedicated and efficient organisation. Existing council electricity networks needed a complete rehabilitation to improve the quality of supply, reduce losses and improve the level of service to customers which required considerable investments.

LECO did not have sufficient funding either for the rehabilitation or expansion of networks. Concurrently, there was an urgent need to improve the financial management of LECO and review the transfer price of electricity from the bulk supplier CEB. In addition, the interim accounting and billing systems needed to be quickly replaced by systems capable of handling rapid increase of customer volumes. All of these required considerable investments.

Within a few months after setting up a skeleton staff, LECO took over its first service area in 1984, the Kotte Urban Council, a network serving 13,000 customers which was incurring 30 per cent energy loss. The Government of Sri Lanka (GoSL) was developing Kotte as the new administrative capital of Sri Lanka. The new Parliament building was already operational.

In Kotte, more administrative buildings were under construction. LECO planned to take over another council network a year later in 1985. Commencing from the councils adjoining Kotte, LECO progressed by taking over council networks according to LECO’s proposed service areas.

 This was the first stage of taking over councils, and it was planned that the rebuilding project of networks would be completed by 1987. LECO took over 10 council networks by 1987. The government, in late 1983 while LECO was being formed, requested technical assistance (TA) from ADB to support establishment and operation of LECO.

Less than one year after LECO was incorporated, ADB prepared the first project and in January 1985, it approved the first loan of USD 12.4 million (later increased to USD 14.8 million) to finance Project I, ‘Secondary Towns Power Distribution Project’, while the balance funds for the USD 30.0 million project were provided by LECO and the government.

LECO estimated it would serve 54,000 customers, both existing and new, when Project I was completed across 10 council networks taken over during the first stage: Kotte, Kotte–Mount Lavinia, Kotikawatta, Maharagama, Peliyagoda, Ja-Ela town, Ja-Ela suburbs, Mahara, Dalugama, and Welisara

The project constructed 33 kV and 11 kV lines, constructed low-voltage lines, replaced distribution transformers, rehabilitated customer connections and replaced electricity meters. The new distribution utility was not without problems. Successful bidders to the project did not honour the bid prices, requiring repeat bidding; material suppliers were lagging behind the delivery schedules, requiring cancellation and resorting to international bidding; poor performance of contractors required reallocating work to other contractors and the political and security situation in the country was not conducive for outdoor work.

The project was completed in 1990, after a two-year delay, but achieved its intended objectives. By the end of 1989, LECO energy losses were down to 16 per cent. Customers served had risen to 179,000. While the successful implementation of Project I was in progress, the second project was proposed to be implemented from 1987 to assist the continued expansion and growth of LECO.

The total cost of Project II was estimated at USD 52.2 million, of which USD 35.1 million was financed by ADB. Although Project II was expected to be completed by June 1991, the completion was substantially delayed by three years. Project II increased the distribution voltage from the dismal 85 V (worst-reported at that time) in many areas to its design level of 230 V, reduced outages by two-thirds and reduced system losses from about 30 per cent to less than 10 per cent in the council networks taken over.

The final project financed by ADB commenced in 1995 Project III. The project included rural electrification, expansion of the upstream 33 kV distribution system, and expansion of the LECO distribution system.

The total project cost was estimated at USD 115.3 million, of which ADB financed USD 71.2 million.

Institutional strengthening led to improved billing and collection systems and faster maintenance services. With the implementation of Project II, financial losses of LECO at its inception gradually reversed. Project II served as a powerful example of the viability that can be achieved with enhanced autonomy to a utility with dedicated staff, and with a strong and independent decision-making structure, despite being a Government agency.

LECO’s corporate profits are significantly more than the profits from distribution business. The remaining profits are dividends earned on investments and interest earned on deposits maintained at banks. From a loss-making utility from its inception until 1990, the company has earned increasing profits.

 This gradual increase peaked in 2006 with a net profit before tax of LKR 965 million. Thereafter, the profit before tax declined owing to unfavourable bulk supply tariffs. LECO reported losses in 2009 and 2010.

LECO has not borrowed by way of long-term loans after the three loans secured from ADB in the initial years over 1980–1990 to rebuild the distribution network. These loans have been fully settled by the end of 2013.

However, the total liabilities of LECO have continued to increase year-on-year from Rs 4.6 billion at the end of 2000 to Rs 11.5 billion by the end of 2017 with the increase of differed income, trade payables, and employee retirement benefits.

But equity in LECO has increased nine times from Rs 3.4 billion at the end of 2000 to Rs 29.1 billion by the end of 2017, strengthening its balance sheet. LECO now has predictable profits from distribution and retail supply activities. However, as the network assets are ageing, LECO has to invest heavily in network upgrades and distribution automation.

The company plans to invest USD 50 million over 2022– 2025 to improve reliability of its network. This project would almost double the asset base of LECO. Much of the planned investments would neither increase sales nor reduce losses; investments are to replace ageing assets and to improve reliability of electricity supply through distribution automation.

“Thanks to the regulatory reforms over 2010–2011 supported by ADB’s technical assistance, LECO’s profits are now predictable, which encourages the management and staff to cautiously adhere to approved costs and watch the network losses. Our allowed network loss was 4.23 per cent for 2019, and we achieved 3.98 per cent. If the losses increase to five per cent against the regulatory limit of 4.23 per cent, that will wipe out almost the entire annual return on investment allowed in the tariff,” GM, LECO, Narendra de Silva, said.

 (Next Week: Privatisation of LECO Stumped)          

By Paneetha Ameresekere