Monday, July 31, 2017

An open letter to BOI, PPP on petroleum, gas and electricity industry

1By Dr. Tilak Siyambalapitiya-Monday, 31 July 2017

logoSo, here we go again. There is a new team leading the Board of Investment. A new PPP agency is in the making, whatever PPP means. PUCSL, the electricity industry regulator, has recently approved an all-diesel power generation plan (name board says ‘gas’ but to the delight of many, they will run on diesel). The oil refinery is ageing and falling apart. While the entire world is drawing comfort in their energy business with low energy prices, Sri Lanka is shivering, moving dangerously towards full-scale power blackouts, shortages and price increases. Why?

To the Board of Investment

Your previous Chairman said in early 2015 that he has received four “proposals” to build liquefied natural gas (LNG) terminals, and that all four will be built. Note: The whole of India has only three terminals; the BOI wants Sri Lanka to have four terminals.

Obviously, the BOI Chairman did not know how much one cost, that the market is only for Sri Lanka (a gas terminal is not a garment factory, to manufacture and export), and that each one costs about $ 700 million. So he accepted “proposals” from four parties, boasted about it and did not allow a systematic process to be followed in procurement. Finally, two and a half years later, all four terminals, their proponents, local agents and the Chairman himself are gone with the wind. Sri Lanka is back to square one.

Adding insult to injury, the Government reportedly issued letters of intent to two countries to build gas terminals. What a joke? Governments do not issue letters of intent to another government. They are not worth the paper on which they are written on. Letters of intent are commercially binding documents, issued after a serious procurement process. You do not issue a letter of intent on an undefined project. Such flimsy documents in the bureaucratic jargon are called ‘non-binding MOUs’. So with a flimsy MoU on a gas terminal, Sri Lanka is again back to square one.

So as of now, Sri Lanka’s dream of importing natural gas is only what it means: i.e. a pipedream and if systematically approached, it need not be a pipedream.

Gas terminals are petroleum industry businesses. Therefore, the Petroleum Ministry should be making decisions on when and where it should be located and what size this terminal should be built. However difficult the bureaucracy, policy and decisions should be managed by the Ministry, not by the BOI. The correct way to do a LNG terminal is as follows:

Step 1: Sri Lankan experts (if required supported by international experts) decide where, what type and what size of gas terminal we need. This has already been done many times over, more firmly in 2014, with a feasibility study produced.

Step 2: Sri Lanka decides what financing mode to follow. The first investment most suitably can be from the State sector, with multilateral banks supporting. Subsequent investments can be privately raised.

Step 3: Prepare bid documents and call for bids to build the terminal. If the decision is for a private investment, issue a structured document calling for binding proposals, bid bonds included. Do not accept (flimsy) “proposals” from friends of the Government for they do not know the gravity of the project.

Step 4: Go ahead and do it!

Finally, BOI, remember that a gas terminal or a power plant is not a garment factory. It costs a lot more, gas customers are all local and if you get it wrong (or not do it at all), it has serious impacts on your own investors who are energy customers, if the gas terminal investor runs away.

LoIs, MOUs, mean nothing to Sri Lanka. Even if it takes time, a structured approach will be the winner. Sri Lanka has tried the approach of ‘call a friend and ask him to build a terminal’ for more than 20 years with no results! The systematic professional approach will be the winner, not the hasty deals, even with a friendly government.

Why? Remember that a gas terminal or a power plant is not a garment factory. The customers are local.
To the new PPP agency

News is flowing in about a belated decision over a new agency to handle PPP projects, whatever that means. In general, PPP means private-public partnerships but in most countries PPP has a different, more practical meaning: “Giving public projects to the private sector, with no competitive bidding, at their design, at their price, and agree to buy their product or service at their price.” Let us assume that in Sri Lanka this will not be the case.

For some projects, PPP is not workable. If a feasibility study says a private investment is not viable for a given project, then it is not viable. Period. Projects can be financially unviable but they can be economically viable. Example: Railway development.

There is no purpose in searching worldwide for that illusive investor for a financially unviable project. Surely there will be enough investors and their agents coming to you saying ‘we will do it, we will do it’ only to run away when their bankers examine and reject the project. By then, Sri Lanka would have wasted a good five years welcoming the bogus investors, filling up newspaper headlines with photos of men in black suits shaking hands with the PPP agency.

We have enough examples, haven’t we? The Katunayake expressway, solid waste management, export refinery in Hambantota. With each project, Sri Lanka wasted over 10 years and only the first one was built ultimately. Not in PPP. Some leaders in Sri Lanka clearly identified what the private sector can do and what they cannot do. Other political leaders and their catcher boys are still learning how to define a project!

Again remember that in the energy sector, both in electricity and hydrocarbons, the customers are all local and getting the correct type of power plant, gas terminal or refinery at the correct price and at the correct time are most important.

To both BOI and PPP agency

The energy sector has certain technical and economic realities. Although solar and wind are useful additions, they cannot stand alone and supply the customers. They need a strong grid, held stable by conventional generators, running cheap. That’s what all countries racing towards renewables did; first the stable power plants, and then the dash to renewables. So renewables are all out in the open while conventional generators are hidden in the jungle, doing their duty to keep the supply stable and patch up when renewables die down.

Sri Lanka started it at the wrong end, but not without reason. We started off with only hydropower, and underwent immense hardships when reservoirs ran dry. In living memory, we have had blackouts in 1974, 1979, 1983, 1987, 1992, 1996, 2001 and 2002 but not thereafter. Did we get better after 2002? No! Governments got wiser, found avenues to award short-term rush-rush contracts, wasting precious money on diesel plants to bridge the gap. They are doing it today as well. If you do not believe this go to the Galle, Hambantota, Kurunegala and Pallekelle substations. How you identify a major substation is when you see tall power lines ending there, and starting off from there. The name board says ‘Grid Substation’. Watch the diesel bowsers going into nearby yards, many a day; listen to the hum of the diesel engines. Do you hear them? That’s it. You have found it. The ingenious way to make you believe Sri Lanka runs on solar panels but actually produces electricity using diesel. Right now 41% of electricity comes from diesel. More is on the way and yet more is coming after the regulator, the PUCSL, ordered CEB to build more diesel power plants (with a name board ‘gas’) for the next 20 years!

Sri Lanka’s electricity system cannot withstand the loss of the largest generator because we have too many weak generators: hydro, solar, wind and diesel. All competitor countries have more reliable power systems. In technical jargon we call it inertia and stability, but the blue-eyed boys in finance and politics do not want to hear any of that. They hate science and mathematics, therefore engineering. Energy is heavily linked to engineering and mathematics. No way out.

Your other investors who use electricity and petroleum have to be told that Sri Lanka’s is not an engineered electricity system and that it is designed by very knowledgeable politicians and the committees that sit in all ministries other than the Energy Ministry, the BOI, and shortly, in the PPP agency. Have more committees to do what the Energy Ministry should do, and when the crisis hits, run away and let the Energy Minister manage it.