Rental power contracts illegal, shady: Transparency International Pakistan

[Naveed Yaseen]

IQBAL MIRZA
KARACHI (September 13 2009): The claim that the charges of rental power plants (RPPs) are only slightly higher than independent power producers (IPPs) is only a myth and wrongly advertised by the RPP companies in press and also quoted by ministers, according to Transparency International Pakistan (TIP).

For example, TIP said, Lakhra Power Generation Company, which has been awarded contract for supply of 202 MW to KESC from its plant established at Korangi, would sell one kwh electricity at Rs 23.34 to KESC as against its current tariff of Rs 8 per kwh being charged from consumers.

Syed Adil Gilani, Chairman of Transparency International Pakistan told Business Recorder that "this is an illegal contract", awarded on modified conditions which did not meet the conditions specified in the tender documents. "This is not allowed under Public Procurement Regulatory Authority (PPRA) rules". It may be mentioned that the Chief Justice of Pakistan had cancelled the Pakistan Steel Mills contract on the same grounds in 2007.

The TIP Chairman, in a letter to Pakistan Power Resources (PPR) on rental power, recalled that more than 12 IPPs had voluntarily reduced their tariff when corruption inquiry was conducted. He quoted the World Bank report on 19902 IPP projects, which indirectly confirmed that the IPPs were not acquired according to the prudent practices.

The report said as under: "several important lessons can be drawn from the Pakistan experience. Setting a bulk tariff ceiling allowed Pakistan to alleviate its power shortage through power generation in record time; however, too much power was contracted with little regard for least cost expansion.

The scale of private investment in generation should be aligned with the country's state of developmentwith respect to selector reforms and also social, economic, political and institutional governance . In addition, solicitation of IPPs should be on a competitive basis and staggered over a few years so that changes in international investors' assessment of country and contract risks could lead to declining bid prices.

Staggering IPP solicitation and scaling down large IPP capacity would also allow the utility to re-assess demand/supply conditions and adjust the contracted capacity and completion timing for subsequent IPPs accordingly."

It is being said by many experts that these recommendations are not adhered to by the Government of Pakistan for the present procurement of RPPs, and that IPPs should first be operated fully before considering the requirement of RPPs.

Like KESC has contracted in December 2008, a five year RPP contract with Walters Power International with bank guarantee or LC for five year rental, at higher cost than IPPs, and not paying cost of two IPPs, Gul Ahmed and Tapal, arrears of Rs 7 billion which has forced them to close down.

"It is prudent electricity generation and distribution business practice to ignore cheap electricity and buy costly electricity? SECP has issued notice to KESC for these acts," Adil said in his letter. The TIP Chairman recalled that Wapda had signed three agreements for rental power between 2006 and 2007 with Northern Power Generating Company.

These were for three years only, and no advance payment was made under the agreements. The fixed rental charges per kwh in those agreements were in descending order every year ie Rs 3.09 in first year, Rs 2.36 in the second year and Rs 2.35 in the third year. The net production was 88 percent, guaranteed for three years. Neither three-year LC was required nor WHT was exempted for the first year.

Under force majeure it is not known whether fixed rental was to be paid to the seller or not. The time of commencement of the project was 120 days. Among the controversial tenders and contracts the TIP Chairman mentioned the following: In 2007 RPP was signed for 135 MW project at Shaikhapora with Iqbal Z.Ahmed of Pakistan Power Resources, based on gas fuel for three years. The tendering process was not known; no advance payment was made, and the time of commencement of the project was 120 days.

In 2008, two more RPP agreements were made, where the advance payment of 7 percent was provided in the agreement, but the duration of agreement was extended to five years with 88 percent net production for old RPP and 93 percent for new RPP. Similarly, five years LC was required and WHT was not exempted for first year.

Under force majeure conditions, fixed rental was to be paid to the seller. Time of commencement of the project is not known. It is stated to be based on competitive bidding by the Private Power Infrastructure Board (PPIB). The RPP contractors are Walters Power International and Karkey of Turkey and the time of commencement was eight months.

TIP's concern is why 7 percent advance payment, increase in contract terms from three to five years, and fixed rental to be paid even in force majeure conditions have been agreed in the contract.

If these conditions were included in the tender documents then who allowed the change from previous contract agreement made in 2006 and 2007. If these were not included in the tender documents, then the contract agreement under Public Procurement Rules 2004 are to be declared as misprocurement, according to TIP.

The PPIB had invited bids through international competitive bidding (ICB) on September 26, 2008 under two packages: (a) package-I (IPP and rental power projects to be commissioned by the end of 2009); (b) package-II (IPP projects to be commissioned by the end of 2010).

Under package-I, no bid was received for IPPs, while under package-II, three bids from the following bidders were received: (a) Engro Power Generation (Pvt) Limited - 527 MW net (b) Reshma Power Generation Limited - 137.11 MW net, and © Saba - 154.07 MW net.

After evaluation of envelope-I (qualification and technical bids) and envelope-II (financial and tariff bids) were opened on March 11, 2009. Among the 14 RPPs, circulated to banks for financing, all proposals are subjected to compliance of tendering procedures as prescribed by PPRA.

Only the Turkish proposal Karkay Rental Power is a foreign direct investment, and is also a new plant, whereas all the rest are very old plants, and are being financed by Pakistani banks, which are already under liquidity crunch for providing loans to other Pakistani ventures.

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