Time to rethink export diversification – with India in mind

By Dhananath Fernando

Originally appeared on the Morning

The call to diversify Sri Lanka’s export basket is not new; it’s a conversation that has spanned decades.

For the most part, our approach has relied on supporting Small and Medium-sized Enterprises (SMEs), extending credit, and helping companies find overseas buyers – largely driven by the Export Development Board (EDB).

During the ‘Yahapalana’ Government, Sri Lanka unveiled a comprehensive National Export Strategy (NES) targeting six promising sectors:

• Information and Communication Technology (ICT) and Business Process Management (BPM)

• Wellness tourism

• Boating and shipbuilding

• Electrical and electronic components

• Processed foods and beverages

• Spices and concentrates

In addition, four cross-cutting areas were introduced to complete the export ecosystem:

• Logistics: streamline supply chains and reduce time-to-market

• National Quality Infrastructure (NQI): upgrade testing, certification, and compliance standards

• Innovation and entrepreneurship: promote R&D, tech adoption, and startup growth

• Trade information and promotion: enhance market intelligence, branding, and buyer linkages

This strategy was widely appreciated at the time. Even the EDB Chairman appointed under President Gotabaya Rajapaksa’s administration pledged to take it forward. But strategies need to evolve. And now, the context has shifted.

A case in point is how Ceylon Cold Stores (CCS) – a subsidiary of John Keells Holdings (JKH) – has taken a new route into India. Rather than exporting directly, as it unsuccessfully attempted in the past due to India’s non-tariff barriers, it has now partnered with Reliance Consumer Products. Through this partnership, CCS products will be distributed across 18,000 Indian outlets.

If the venture proves successful, we could see CCS expanding operations further, either producing in Sri Lanka for export or even setting up shop in India. This is a powerful lesson; if we are truly serious about diversifying exports, India is a market we can’t afford to ignore. But the route may not always be direct; it could mean partnerships, joint ventures, or becoming part of Indian supply chains.

And it’s not just consumer goods. While CCS is expanding into India, some Sri Lankan banks, now holding excess US Dollar reserves, are looking to partner with the Gujarat International Finance Tec-City (GIFT City).

Several bank CEOs in Sri Lanka who have already invested have stated that their goal is to support Sri Lankan companies investing in India – or even Indian companies operating here. In fact, many Sri Lankan service sector firms are already functioning in India. This is a clear signal: the momentum has shifted. The landscape is changing and we are slow to adapt.

Meanwhile, India is also reshaping the global trade map. It has already signed a Free Trade Agreement (FTA) with the UK, and is in the final stages of a similar deal with the European Union (EU). Under the UK deal, 99% of Indian exports to the UK will be tariff-free, and 90% of UK goods will get similar access to India – significant reductions even for alcohol products.

Once the EU deal is signed, exporters will have even more incentive to route products from India, especially given Sri Lanka’s uncertain GSP+ status. So, if we try to compete head-on with India in the same markets, we may be setting ourselves up for disappointment. Instead, we should look at how we can complement India – join its supply chains and offer what India alone cannot.

One such overlooked area is electricity exports. Back in 2016-’17, when the NES was developed, the potential of renewable energy in Sri Lanka was limited. Today, that picture has changed dramatically. Solar and wind investments have surged, and with the right policy push, electricity exports to India could become a serious reality.

This example illustrates a broader point: strategies must be dynamic. Markets evolve, technologies advance, and regional power equations shift.

India, for instance, is integrating rapidly with global and regional markets. Sri Lanka can ride that wave, or watch others benefit in our place. With geopolitical winds also shifting – particularly with the West looking for reliable partners in the region – India is too big to be left out of any serious trade or investment plan.

If we play our cards right, Indian growth could also drive investment into Sri Lanka, especially in sectors that support exports. But to unlock that opportunity, we need serious structural reforms:

• Industrial lands must be made available, ideally through private sector-led zones with minimal red tape and a streamlined Board of Investment

• Electricity sector reforms are non-negotiable – both to reduce domestic costs and to enable energy exports

• Trade facilitation through a modernised Customs act is essential to attract investors eyeing India via Sri Lanka

• Debt sustainability must be maintained – no investor will bet on a country flirting with default

• State-Owned Enterprises (SOEs) must be restructured to reduce the fiscal burden and unlock productivity

In short, if we are serious about export diversification, we must acknowledge that the rules of the game have changed. Old models won’t work in a new world. India is no longer just a neighbour; it is a gateway, a competitor, and a partner all at once.

The question is: will we adapt fast enough to matter?

Why SL’s electricity sector keeps failing its users

By Dhananath Fernando

Originally appeared on the Morning

The tug of war between the Ceylon Electricity Board (CEB) and the Public Utilities Commission of Sri Lanka (PUCSL) is not new to Sri Lankans – or to taxpayers. 

At one point during President Maithripala Sirisena’s tenure, a Cabinet meeting was called off until the CEB and PUCSL reached an agreement on tariff revisions. In another bizarre chapter, the CEB even organised a special pooja to invoke rain gods, hoping to avoid power cuts and tariff hikes.

Now, the conversation has returned, with the International Monetary Fund (IMF) insisting that electricity tariffs must be cost-reflective as a condition for the release of the next tranche of funding. While there is a lot of noise about tariff hikes and methodologies, the critical push for structural reform remains absent. Once again, electricity users find themselves on the receiving end, with little clarity on a long-term path to reduce costs.

Concerns have deepened with proposed amendments to the Electricity Act that threaten to roll back past reforms. The outcome? Consumers and industries may have to bear higher electricity costs, whether as tariffs, taxes, or inflation.

Understanding the basics: What drives tariff structures?

There are three core principles when it comes to setting electricity tariffs:

Electricity is a homogeneous product: One kilowatt (kW) of electricity provides the same energy, regardless of whether it comes from coal, wind, or solar. While the cost of generation varies, the energy output is identical.

The cost of electricity varies by time of use: Although electricity is a homogeneous product, its cost fluctuates based on demand. Peak-hour electricity typically costs more, as it relies on expensive and quick-response generation sources.

Electricity is hard to store: Unlike other commodities, storing electricity is extremely costly. This means supply and demand must be balanced in real time, making pricing and grid stability critical.

Cost-reflective pricing is currently the principle we follow, largely in line with IMF recommendations. But cost-reflectivity alone is not enough. If the system’s inefficiencies remain unaddressed, then reflective prices will only continue to rise. 

Previously, we ignored this reality by allowing the CEB to operate at a loss. These losses didn’t vanish; they resurfaced as taxes, inflation (when financed by money printing), or higher interest rates (when financed through debt).

Why are costs high?

One of the main reasons for persistently high electricity costs is our outdated grid infrastructure. Our failure to connect to India’s electricity grid also leaves us with missed opportunities. A grid connection with India could help us stabilise our own grid and export surplus electricity – particularly solar power – thereby reducing domestic costs through offsetting.

Worse yet, the new amendments to the Electricity Act propose rebundling generation, transmission, and distribution, undoing previous reforms that sought to separate them. Unbundling improves accountability and productivity; rebundling risks taking us backward.

What should be done: Now and long-term

Long-overdue transmission upgrades require significant capital. For that, we need a structure that welcomes private investment while ensuring strong regulatory oversight. Currently, the regulator is weak, and the CEB, as a State monopoly, easily passes cost increases onto consumers without consequence.

Electricity reform is complicated and takes time. But while we figure out long-term changes, here are a few short-term, actionable steps that could help manage the situation:

1. Unify user categories: Sri Lanka currently maintains multiple user categories – domestic, religious, Government, etc. – violating the principle of homogeneity. A single unit of electricity cannot and should not be priced differently at the same time for different consumers. Instead of offering cross-subsidised tariffs, direct cash transfers should be used to support vulnerable consumers. This will promote demand-side efficiency and encourage responsible energy use.

2. Abolish Rate 1 and adopt Time-of-Use (TOU) pricing: The Rate 1 category for bulk users must be eliminated. Instead, TOU pricing should be applied universally. Uniform pricing flattens important price signals and discourages efficient energy use. TOU pricing, on the other hand, encourages load shifting, optimises grid use, and better reflects real costs.

3. Improve cost transparency: When reporting its cost structure, the CEB must clearly separate:

• Generation costs: Disaggregated by plant, including fuel, labour, maintenance, and capital, along with justifications for deviations from least-cost dispatch principles

• Network costs: Covering transmission and distribution infrastructure

• Overheads: Including administration, billing, metering, and customer services

Similarly, losses must be broken down into:

• Technical losses: From grid, transformers, and substations

• Commercial losses: From theft, faulty meters, or billing errors

• Collection losses: From non-payment or delays

Transparency will shine a light on inefficiencies, allowing policymakers and the public to demand reform based on evidence.

Cost-reflective pricing is necessary, but not sufficient. What matters more is reducing the cost itself. And that cannot be done by regulation alone. It requires competition, productivity, and bold structural reforms. 

Until we summon the political courage to tackle these long-standing issues, the electricity sector will remain trapped in a cycle of inefficiency, passing the burden from the State to the citizen, again and again.

(Source: Advocata submission to PUCSL on electricity tariffs)

Lanka’s fuel price tug of war: Who really pays the price?

By Dhananath Fernando

Originally appeared on the Morning

Fuel prices and fuel price revisions have always been a political football. Statements by various politicians on the taxes imposed on fuel and the scope for reducing fuel prices have come under renewed scrutiny with the 31 October price announcements.

Adding to the confusion, a statement by the Ceylon Petroleum Corporation (CPC) Chairman – that the CPC must compensate for the losses of other players if deviating from the price formula – has sparked fresh controversy. It’s essential to unpack these issues one at a time.

According to Central Bank data, we imported approximately $ 1.5 billion in refined petroleum and $ 0.5 billion in crude oil in the first half of the year. Assuming demand and prices remain steady, total fuel imports this year will be around $ 4 billion.

About 70% of fuel is consumed by the top 30% of high-income earners in Sri Lanka who can actually afford higher fuel prices. Naturally, energy consumption rises with income, as wealthier households use personal vehicles, high-energy appliances, and consume more overall. Only 30% of the total fuel is consumed by the remaining 70% of the population, which includes fishermen, public transport users, and service providers.

Thus, if we artificially lower fuel prices through a subsidy, it effectively subsidises the wealthiest families in Sri Lanka. While a low-tax regime might be ideal, given our fiscal situation and the International Monetary Fund (IMF) programme, Government revenue must increase to about 15% of GDP. Lowering fuel taxes would thus provide tax relief to the wealthiest 30% of households and incentivise excessive fuel consumption.

Imperative to adhere to fuel formula

Instead of being swayed by popular demands to reduce fuel prices, especially with rising tensions in the Middle East, the Government should first review its balance sheet to ensure adequate revenue with minimal market distortions to achieve debt sustainability.

If the Government aims to lower fuel prices for the public transport and fisheries sectors, the best approach would be a direct cash transfer rather than lowering all fuel prices, which would mitigate the impact of high fuel prices on essential goods and services.

It is imperative that we stick with the fuel formula and strengthen it if necessary. Unfortunately, there is limited information regarding the recent controversy over agreements between fuel suppliers on price revisions. If, as the Chairman claims, there is a clause to compensate private players for losses, this would be unreasonable if true.

In the absence of the full report, the only available information is a post on X from the former Minister of Power and Energy, who claims the CPC only pays the difference when the Government provides a subsidy or other mechanism to deviate from the price formula. In fairness to private players, if only the CPC receives a fuel subsidy, it creates an unlevel playing field, as petrol and diesel would be cheaper at CPC stations than at private ones.

Although the subsidy benefits consumers, it primarily benefits the wealthiest 30%, and rising demand could drastically increase the total subsidy cost for the Government. Therefore, a fuel subsidy is not advisable, as it essentially transfers Treasury funds to the wealthiest households in Sri Lanka.

Another issue has arisen: one supplier has reportedly requested about Rs. 82 million as compensation for deviations from the fuel price formula. It is difficult to assess this claim fully, as the original documents are not publicly available, but if true, it raises questions about whether recent price revisions adhered to the formula.

In particular, price adjustments before and after the elections require examination. Data on whether the September and October price revisions complied with the formula has also not been published; making this information available would reduce information asymmetry, essential for a functioning market economy.

Providing consumers with the best price

A further question is whether only a Government-owned CPC can reduce prices, and why prices are not decreasing with private players like Lanka IOC, Sinopec, RM Parks, and United Petroleum in the market.

The answer is not straightforward. The CPC is already heavily in debt, with high financing costs that must be covered. Moreover, prior to the latest revision, Sinopec’s diesel prices were actually lower than others, illustrating how competition can bring prices down.

However, prices depend on global crude and refined oil rates, and sometimes on the efficiency of refineries. When a price formula is in place in a small market, players often charge similar prices, but more competitors could introduce value propositions, including price variations based on global fluctuations.

For example, Lanka IOC offered an environmentally friendly fuel at a higher price, while Sinopec sold diesel at a lower price. To remain competitive, each player must offer something unique, which may not always be a lower price but can include quality or convenience.

The final point is that the new administration has requested a flat dealer margin instead of a percentage tied to global fuel prices, which is a positive move. Dealer costs are mainly influenced by inflation rather than global prices. The purpose of the price formula is to account for both variable and fixed costs to prevent losses and provide consumers with the best price.

In a market system, the consumer is at the centre. To prioritise consumer needs, we must ensure multiple players and transparency in pricing to minimise information asymmetry. Publishing the final fuel price revision calculations for the past two months and the full price revision agreement with private players would be a constructive first step.