Sri Lanka's Power Sector Attracts Private investors

19th April 2010, www.lankabusinessonline.com

More private investment is likely to get attracted to Sri Lanka's power sector given stable and growing demand and improve profitability especially among hydro-power producers, a ratings agency report said.

However, investments will be restricted to small power plants of less than 25 megawatts capacity as a new electricity law requires bigger plants to be controlled by government, RAM Ratings (Lanka) said.

It said in a report on the island's power sector that it was important to restore the long-term financial viability of the loss-making, heavily indebted sole buyer of power, the state-owned Ceylon Electricity Board.

"While Sri Lanka may have closed its door to large-scale IPPs, it has embraced the role of IPPs in the 'less than 25 MW' capacity segment," the RAM report said.

" . . . we note that more IPPs are likely to be attracted to the power sector given its salient features such as stable demand, moderate operating risks and long life of assets."

However, the ratings agency identified several inherent risks from a credit-rating perspective.

These include customer-concentration risk as the CEB is the sole purchaser of power, as well as construction risk involving a company’s possible failure to complete construction on time, and fuel risk based on possible interruptions in fuel supply.

RAM Ratings noted that private hydro-power players have improved their profitability of late.

"Their impressive profit performance is underpinned by lower debt levels, better tariff rates and heightened power generation," the report said.

"We observe that these profitability indicators may entice further investor interest in the local power sector."

Private power producers have also sought to dilute their site risks through acquisitions, which so far have not "overly strained" the companies’ balance sheets.

"From a private-investment perspective, the power sector is unique as it is a non-cyclical industry," the report said.

Demand for electricity in Sri Lanka has been increasing with economic growth and more electrification and remains resilient even amid economic downturns.

"This fundamental characteristic results in a stable or predictable cash flow provided there is no off-taker default," the rating agency said referring to the loss-making CEB's capacity to pay.

"In Sri Lanka, the CEB is the sole off-taker; hence the IPPs’ debt-servicing aptitude depends on the off-taker’s willingness and ability to pay its bills on time."

RAM Ratings Lanka said its assessment of the CEB is based more on its systemic importance rather than its financial profile.

In 2008, the state utility company owed 57 billion rupees to the IPPs.

According to the Central Bank the CEB's finances remained weak in 2009 although it had managed to reduce its operating loss to 7.4 billion rupees from 33.3 billion in 2008.

CEB’s short-term borrowings from banks and other outstanding liabilities to the state-owned fuel refiner and to Independent Power Producers increased to 71.6 billion rupees in 2009, the Central Bank said.