The State-run Ceylon Electricity Board (CEB) is at a crossroads regarding its fuel procurement practices. Pressure to introduce competitive bidding is mounting, fuelled by rising fuel costs and concerns over transparency. While officials and unions defend the current arrangement with the Ceylon Petroleum Corporation (CPC), the potential for reform remains on the table.

In the current context, Sri Lanka’s thermal power generation, which relies on fossil fuels, will continue to depend on imports. The CPC currently supplies all the petroleum products needed for these thermal power stations. This arrangement, characterised by direct transactions without competitive bidding, has drawn criticism for potentially leading to inflated costs.

Gaps in procurement practices

According to the CEB’s Long-Term Generation Expansion Plan (LTGEP) 2023-2042, from 2018 to 2021, the weighted average of the Cost, Insurance, and Freight (CIF) price for crude oil imported to Sri Lanka was $ 60.74 per barrel, aligning closely with the Brent Crude Oil Index during that period. However, the first four months of 2022 saw a significant rise in crude oil prices, reaching $ 100.60 per barrel due to various global economic factors.

Furthermore, an audit report issued by the National Audit Office (NAO) on the CEB pointed out a sharp increase in fuel expenditure, with costs soaring by 182.59% between 2021 and 2022, rising from Rs. 24,373 million to Rs. 68,875 million. 

The report stressed the lack of formal agreements governing these transactions, highlighting that no contractual terms had been established for fuel purchases from the CPC. This absence of formal agreements has raised concerns about inefficiencies and disputes that could hinder the smooth operation of the CEB.

Given that millions of rupees are spent on fuel purchases, transitioning to competitive bidding becomes crucial. Without it, the CEB would be compelled to rely solely on the CPC, leaving little room to explore alternative methods for procuring fuel at lower prices. Competitive bidding could introduce more options, potentially leading to significant savings in fuel procurement, ultimately benefiting both the CEB and consumers.

Nevertheless, as recently clarified by the CEB, there is no proper agreement with the CPC or any decision to adopt competitive bidding. When contacted by The Sunday Morning, a senior official from the CEB, who wished to remain anonymous, acknowledged the concerns. 

“The report highlights the gaps in our procurement practices,” the official said. “We recognise the need for a more structured approach to fuel procurement.”

This surge in costs was attributed to rising global oil prices and inefficiencies in the procurement process. The report also revealed that the lack of formal agreements left critical operational aspects unregulated.

In response to these findings, as revealed by the NAO, a committee was established in 2022 to draft a Power Sale Agreement (PSA) to formalise the CEB’s dealings with the Lanka Electricity Company (LECO). The draft was shared with LECO’s management and a joint meeting was held with the Public Utilities Commission of Sri Lanka (PUCSL) to discuss the draft’s contents. As of now, the PSA is still under review, with a finalised version expected to be sent to LECO soon.

Competitive bidding

In light of the audit report, there have been discussions about transitioning to a competitive bidding process for fuel procurement. A senior electrical engineer at the CEB, who wished to remain anonymous, stated: “Adopting competitive bidding could potentially lead to better pricing for fuel. It allows us to explore market options and secure more favourable terms.”

However, the absence of an existing formal procurement agreement with the CPC poses challenges to such a transition. The CEB has faced internal and external pressures to consider competitive procurement practices, but officials have recently stressed that any changes would need to comply with existing legal frameworks.

Commenting on competitive bidding, Lanka Viduli Sevaka Sangamaya (LVSS) President Ranjan Jayalal, whose union represents CEB employees, said: “The CPC is obliged to supply fuel to the CEB, as both are State entities. This arrangement has existed for years and there is no reason to pursue competitive bidding.”

According to the CEB, its fuel expenses have become a significant concern for the energy sector. With fuel costs representing a substantial portion of electricity generation expenses, any increases are likely to be passed on to consumers. 

The CEB’s recent figures indicate that the rising cost of fuel directly impacts electricity tariffs, aggravating the financial burden on households and businesses. Especially during the dry season last year and early this year, the board spent a massive sum of money on fuel purchases. The fuel prices, according to the CEB, have added to the generation cost, which will automatically be passed on to customers.

“Consumers should not bear the brunt of inefficient procurement practices. Transparency in fuel procurement is essential for fair pricing,” the senior engineer stressed.

One of the primary obstacles to implementing competitive bidding for fuel procurement is the legal framework governing State-Owned Enterprises (SOEs) in Sri Lanka. The CEB Act and related regulations have traditionally facilitated direct transactions with the CPC, limiting the CEB’s ability to explore other procurement options, according to Jayalal.

In a recent statement, CEB Additional General Manager for Corporate Strategy Eng. M. Fernando clarified that no formal decision to switch to competitive bidding had been made. “We have always sourced fuel from the CPC, and while discussions are ongoing, we have yet to reach a consensus on competitive bidding,” he stated.

The lack of competitive bidding raises concerns about transparency in the procurement process. As the CEB continues its exclusive relationship with the CPC, questions about accountability and oversight remain prominent. The absence of a bidding process means that procurement lacks a layer of scrutiny typically present in more open market scenarios.

Experts believe that introducing competitive bidding will necessitate rigorous oversight mechanisms to ensure that the process is fair and free of corruption. “Without competition, there’s little incentive to keep costs in check. Competitive bidding could help us establish a more transparent and accountable procurement process,” said the engineer. 

When contacted, CEB Spokesman Eng. Dhanushka Parakramasinghe said that the board planned to provide a detailed clarification within the week on why it had not procured fuel through a competitive bidding process.

However, a senior official from the CEB, who wished to remain anonymous, stated that heavy fuel oil and naphtha were by-products of the Sapugaskanda oil refinery, and the lowest-cost source for procuring these two products was the CPC. The official noted that while the CEB did procure diesel at market prices, its diesel requirement was minimal and was mainly used for pre-generation activities.