Electricity Constraints Are Dampening Growth of Sri Lanka’s Small and Medium Industries

“Out of twenty four to twenty six working days a month, we have reliable full days of uninterrupted power for only ten to thirteen days”, is what Mr. Poornachandran, President of the Yarlpanam Chamber of Commerce lamented at a public-private stakeholder consultation hosted by an SME-focused Ministry in Colombo recently. He repeated this gripe at a post-budget discussion held in Colombo this week. Mr. Poornachandran heads the leading business chamber in Sri Lanka’s Jaffna district, which was caught up in the conflict that ravaged the country for thirty years. Building the small and medium enterprise sector in conflict-affected areas is challenging as it is, and many new opportunities are opening up, but the issue of electricity continues to blight the recovery of the region. But it’s not just in war-recovering districts like Jaffna. Mr. Poornachandran shares this frustration with his fellow businessmen in other parts of the country.

Last week, I visited a couple of Industrial Estates in the Kalutara district (which borders the capital district of Colombo) which are home to many small and medium industries (SMIs). Speaking with the small and medium-scale industrialists there I realised that electricity issues are severely hampering their operations. One medium-scale industrialist, who produces rubber products for the Swedish market and employs nearly 500 people, noted that his plant faced 118.5 ‘electricity down hours’ last year. This is an average of over 2 hours a week, but in some weeks it peaked to as high as 10-14 hours. Another small industrialist in the Estate, who produces ornamental ceramic products for the local and international market remarked (translated from Sinhala) that, “the power brown outs not only ruin our machinery, they cause production delays, increase costs, and cause a higher proportion of rejects”. Another industrialist remarked to me that at an Industrial Estate in Ekala, just North of Colombo, there have recently been 14 electricity ‘brown outs’ in as many days.

A forthcoming World Bank report also highlighted this issue. The report entitled ‘More and Better Jobs in South Asia’, publishing results from country-level Enterprise Surveys, shows that electricity is the number one constraint for enterprises in Sri Lanka, and is in at least the top 5 list of constraints for all South Asian countries. The report investigates major constraints hindering employment generation and expansion of enterprises, and their severity, through the surveys. While in Sri Lanka electricity is reported as the top constraint, it is second most severe constraint for a South Asian benchmark firm in the urban formal sector (a benchmark firm is defined as a medium-size manufacturing firm with 30 employees that is domestically owned, does not export or import and, is located in a large city).

More significantly, according to the Enterprise Survey results contained in the jobs report, electricity in Sri Lanka out ranks other constraints such as business licensing, corruption, political instability and macro instability. It is the top constraint for medium-size and micro benchmark firms in the urban formal sector and second most severe in a micro benchmark firm in the rural sector in Sri Lanka . These results indicate the severity of electricity related issues for the commercial sector in the country.

Industrial firms in Sri Lanka are faced with three main bottlenecks with regard to electricity - accessibility, reliability and affordability. The problem isn’t new. Even in 2004, a World Bank report Sri Lanka: Improving the Rural and Investment Climate identified that over 40% of urban manufacturing firms and 25% of rural enterprises in Sri Lanka found electricity to be a major bottleneck for enterprise growth. The report noted that less than 70% of rural enterprises received electricity from the national grid . This has no doubt changed since then. Electrification levels in Sri Lanka have improved significantly and by the end of 2010 it was estimated at 90%. Yet, we must remember that this was achieved partly due to the host of rural electrification schemes, many of which are not yet connected to the national grid.

Apart from urban centres, particularly in the Western Province, few areas enjoy uninterrupted power supply in the country - 52% of medium-size enterprises in Sri Lanka are compelled to use generators to cope with power outages. Generators could account for as much as 12% of a firm’s fixed assets on average. So, the lack of reliable power supply significantly impacts operational costs of Sri Lanka’s industries, which in turn impinges on their competitiveness.

Meanwhile, electricity coverage in most parts of Sri Lanka is reaching 80-90% under an unprecedented electrification scheme launched by the government. This is extremely laudable, and will no doubt bolster the current efforts to promote inclusive growth. Yet, in many areas, electricity reliability and continuity continues to dampen the business environment for small and medium industries (SMIs). This needs to be addressed fast, particularly as SMIs are the backbone of the Sri Lankan economy and will play a critical role in ensuring inclusive growth through local private sector development in post-war Sri Lanka.

Click here for a compilation of articles on “Ongoing Issues in Sri Lanka’s Electricity Sector” via the free online tool ‘Bundlr’

The author acknowledges the input provided by Buddhika Brahmanage, Research Assistant – IPS, in writing this article.