3 ECONOMIC AND SOCIAL INFRASTRUCTURE 3.1 Overview he drive towards improving economic and financial position of the Ceylon Electricity Board social infrastructure of the country continued (CEB) remained weak, an improvement was during 2018 with the view of improving the witnessed, compared to the previous year. The Toverall wellbeing of the people. The efforts in this Public Utilities Commission of Sri Lanka (PUCSL) regard included infrastructure development projects approved the base case Least Cost Long-Term as well as policy measures aimed at enhancing the Generation Expansion Plan (LCLTGEP) in June provision of economic and social infrastructure. 2018. However, ensuring uninterrupted power Mainly as a result of the non-adjustment of domestic supplies at an affordable cost depends on expediting retail prices in line with higher average international the implementation process for new projects to allow petroleum prices and the depreciation of the rupee, a sustainable and optimal generation mix. However, the financial performance of the Ceylon Petroleum the burden of CEB losses to the tax payers needs Corporation (CPC) weakened considerably in 2018. to be minimised by introducing a cost reflective The cost reflective pricing mechanism for domestic pricing formula, which will make users pay the retail petroleum products that was established in true cost while subsidising targeted low income May 2018 continued thereafter, albeit with some households. The Moragahakanda hydropower interruptions during the fourth quarter of the year. project was commissioned during the year, while The effective implementation of the petroleum the construction of Uma Oya and Moragolla pricing formula is essential to address continued hydropower projects continued. Meanwhile, port losses accrued by this key State Owned Business related activities witnessed a notable expansion Enterprise and to protect revenue collection particularly with the port of Colombo being ranked as Sri Lanka’s taxes on petroleum products are as the fastest growing port among the top 30 relatively low compared to its regional peers. container ports of the world during the year. Meanwhile, favourable rainfall in catchment areas Further, civil aviation activities also recorded an supported increased contribution from low cost expansion during the year supported by increased hydropower generation in meeting the electricity tourist arrivals. Rail transportation and public road demand during the year. Accordingly, although the transportation, in the meantime, recorded a modest CENTRAL BANK OF SRI LANKA | ANNUAL REPORT 2018 performance during the year highlighting the need while enhancing the quality assurance framework, for better quality transportation services to attract particularly within health, general education and the general public towards public transportation higher education sectors, are important aspects and reduce traffic congestion. Road development going forward. projects, including the construction work of the Outer Circular Highway (OCH) and the Central 3.2 Economic Infrastructure Expressway, continued while the feasibility study Policies, Institutional of the Ruwanpura Expressway was completed. Framework and Performance Meanwhile, urban development projects also Petroleum continued including the land reclamation work of the Colombo Port City Project, which was completed in Global crude oil (Brent) prices recorded a the early part of 2019. notable increase during 2018 before declining The government, with the support of the private in the last two months of the year. Brent prices sector, continued to provide health and education showed an upward trend from mid-2017 until end 3 May 2018 when prices fell over the expectations services with a view to enhancing the human capital of the country. During 2018, the government that the Organisation of the Petroleum Exporting Countries (OPEC) could wind down the output took measures to control the spread of both deal, which was in place since the beginning of communicable and non-communicable diseases 2017. However, supply concerns in relation to US while implementing measures to improve the quality trade sanctions on Iran resulted in an uptick in oil of education through strengthening initiatives such prices from mid-August to early-October 2018. as the ‘13 years of guaranteed education’ and the Brent prices reached a peak of US dollars 86 on ‘nearest school is the best school’ programme. 04 October 2018, which was its highest level since Social safety net programmes to safeguard the October 2014. Subsequently, from November 2018, welfare of the vulnerable were carried out by the Brent prices followed a declining trend due to the government during the year, with increased efforts build-up of global inventories and record levels to ensure the effectiveness of these initiatives in of oil production from the world’s three largest empowering beneficiaries and enabling better producers, i.e. the US, Russia and Saudi Arabia, targeting. As the limited fiscal space constrains along with uncertainties about future global demand public spending towards enhancing economic growth, particularly with the slowdown of China and social infrastructure, facilitating Public Private and several advanced economies. Accordingly, the average crude oil (Brent) price that stood at US Partnerships in developing economic infrastructure dollars 80.93 per barrel in October 2018 declined Table 3.1 to US dollars 58.16 per barrel in December 2018. Government Investment in Infrastructure However, on average, Brent price was 31 per cent Economic Social Total Services Services higher at US dollars 71.76 per barrel in 2018, compared Year Rs. As a % Rs. As a % Rs. As a % to US dollars 54.76 in 2017. billion of GDP billion of GDP billion of GDP 2014 330.1 3.2 112.3 1.1 442.5 4.3 2015 429.0 3.9 124.4 1.1 553.4 5.1 The average price of crude oil imports of the 2016 424.0 3.5 117.3 1.0 541.3 4.5 CPC moved in line with global crude oil prices. 2017 474.1 3.5 135.4 1.0 609.5 4.5 2018 (a) 437.9 3.3 133.2 1.0 571.1 4.3 Consequently, the average price of crude oil imported (a) Provisional Sources: Ministry of Finance Department of Census and Statistics by the CPC increased by 31.9 per cent to US dollars Central Bank of Sri Lanka 76.25 per barrel in 2018 from the average price of 88 ECONOMIC AND SOCIAL INFRASTRUCTURE Figure 3.1 Petroleum Sector Snapshot - 2018 Figure 3.1 Petroleum Sector Snapshot - 2018 A PRICING FORMULA DEC 17 MAR 18 JUN 18 SEP 18 DEC 18 MAR 19 was introduced for domestic petroleum products of the CPC Sector Wise PETROLEUM 3 169 161 159 by the CPC (Mn Ltrs) 155 157 164 SALES 159 152 148 155 149 147 Domestic 149 281 Petrol 95 128 145 137 145 (29% Y-O-Y) 132 141 140 129 135 125 130 133 117 129 Petrol 92 136 134 Aviation Industries 131 123 119 123 126 162 118 631 Super Diesel 110 121 118 (13% Y-O-Y) 109 116 (9% Y-O-Y) 111 103 104 106 Auto Diesel 95 101 101 99 Exports 70 Power 126 Generation Kerosene 44 866 (-34% Y-O-Y) Transportation 3,552 JAN 17 MAY 18 JUL 18 OCT 18 DEC 18 MAR 19 (6% Y-O-Y) Rened Products (2,937) Imports of Refined Products grew by (978) Crude Oil 19.3 per cent Imports of Crude oil grew by 38.9 per cent L.P. Gas (266) Imports of L.P. Gas recorded a Imports of Coal recorded a growth of 14 per cent negative growth of 9.5 per cent Coal (237) Imports of Fossil Fuels (Value, US$ million) 89 CENTRAL BANK OF SRI LANKA | ANNUAL REPORT 2018 Petroleum products sales decreased in 2018 Figure 3.2 Average Price of Crude Oil (Brent) in the International with the decline in demand from the power Market and the Crude Oil Import Price of the CPC generation sector. During the year, total local 90 sales of petrol grew by 6.9 per cent in comparison 80 to the previous year. The sharp increase in the 70 l 60 import of motor vehicles was a considerable factor. b b / $ S 50 U Meanwhile, total domestic sales of diesel declined 40 by 8.3 per cent due to lower fuel oil based power 30 20 generation as a result of increased hydropower 5 6 5 5 5 7 6 6 6 8 7 7 7 8 8 8 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - - - - - - - - - - - - - - - l l l l t t t t r r r r n n n n c c c c u u u u p p p p a J a J a J a J A A A A J J J J generation. Hence, in 2018, petroleum sales to the O O O O Brent CPC Import Price Sources: Bloomberg power generation sector was 34.0 per cent lower Ceylon Petroleum Corporation than the previous year. Kerosene sales showed a significant increase of 30.4 per cent during 2018 US dollars 57.79 per barrel in the preceding year. 3 in comparison to the preceding year. During 2018, Meanwhile, the average import price of refined total petroleum sales to the transportation and petroleum products by the CPC increased by aviation sectors grew by 1.8 per cent and 9.3 25.3 per cent to US dollars 650.2 per MT in 2018, per cent, respectively. from US dollars 518.9 per MT in 2017. Financial performance of the CPC deteriorated Domestic retail prices of petroleum products substantially during 2018, amidst rising were revised periodically during 2018, with global oil prices, depreciation of the the implementation of a cost reflective pricing rupee against the US dollar and the non- formula in May 2018.