ADB finds rental power deals faulty
By Khaleeq Kiani
Saturday, 30 Jan, 2010
According to the report, the third-party review by the ADB also highlighted that the current power crisis was largely a fuel crisis caused by increase in furnace oil prices and delays in finding a substitute for depleting domestic gas supplies.
ISLAMABAD: The government released on Friday the Asian Development Bank report on rental power projects (RPPs) which highlights major inconsistencies and weaknesses in the contracts, violation of procurement and regulatory procedures, lack of available capacity utilisation and up to 87 per cent increase in customer tariff in two years.
The Ministry of Water and Power, which released the report, has tried to challenge observations made in the report through an addendum, saying the ADB disregarded some of the losses the economy suffered because of loadshedding.
The report said the addition of even 14 RPPs would not eliminate the loadshedding. “Overall, rental service agreements are weak in their legal structure, do not balance the risk sharing between the seller and the buyer and have many inconsistencies.”
The ADB suggested that about 2,000MW of electricity could have been utilised from within the existing system through full-capacity utilisation (of 997MW closed plants) and energy conservation measures (1,300MW). The report said that RPPs would put an additional financial burden of up to Rs207 billion on the government.
The ADP did not clear eight RPPs on merit, as implied by certain quarters, but gave the go-head as a fait accompli because of already signed contract and payment of mobilisation advance.
The report said: “From customer perspective, under the no-RPP scenario, in fiscal 2011 they will face a tariff of Rs9.23 (from current Rs5.54), an increase of 67 per cent in two years. With 14 RPPs, tariff increases by 80 per cent to Rs9.96. In case of eight RPPs, the tariff increases by 75 per cent to Rs9.68. The low gas scenario is the worst from customer perspective as tariff in this case increases by 87 per cent to Rs10.33 with 14 RPPs.
“However, this scenario is based on exchange rate of Rs83.55 a dollar, fuel price of Rs44,818 per ton, gas price of Rs333 per mmbtu and if the government did not provide subsidy as committed with the International Monetary Fund.”
The report said that original RPPs were based on advance payment of seven per cent, but the post-bid addition of standby letters of credit (SBLC) changed the financial situation in favour of RPPs.
“Since RPPs are emergency measures where time is premium, it would have been prudent for the buyer to investigate the cost of confirmation before offering SBLC to the market and definitely before making down payment. This changed the situation and “weakened the government’s negotiating position with bidders and a new security package of 14 per cent advance down payment combined with an annual renewable GoP (government of Pakistan) guarantee to cover the buyers obligations, other than fuel payments which are covered under a separate SBLC was provided.”
The report said the provision of GoP guarantee and a high down payment-post bid was a major change under any prudent procurement guidelines as it changed the financial, equity and project risk profile in favour for RPPs. Had the revised arrangements been taken to the market, the government would have gotten better terms. “This, combined with the acceptance of unsolicited bids, diluted the transparency, competition and equal treatment that an international competitive bidding process is in intended to ensure.”
The ADB said that against National Electric Power Regulatory Authority (Nepra) rules, generation companies had sought its approval of power procurement contracts with RPPs-post contract signing, “raising questions about the process”. The resolution of the SBLC issue contributed to delays and derailed a major objective to have rental power in place by the end of Dec 2009. “In fact no RPP has been commissioned to date”.
Two RPPs installed in 2006 had mostly remained off-line, the ADP said.
The report said that performance guarantees obtained from RPPs were not uniform, were lower than the standards and inadequate to cover penalties because these were charged against future payments. In the tariff setting too, the hands of Nepra were tied and infringed on its powers and jurisdiction.
“Contrary to the rules, Gencos (generation companies) did not obtain approval from Nepra of terms of the contract before signing. By applying for approval after signing a contract and when project is advanced it is forcing Nepra’s hand and also raises question of transparency, encroachment on Nepra’s mandate to ensure affordable and sustainable power supply.”
The report said about 997MW of installed IPPs’ unutilised capacity could be brought into the system that remained out of the system due to contractual and administrative reasons, while addition of energy-saver bulbs could also reduce loadshedding by 1,133MW. The two steps together could bring peak loadshedding to 850MW even without an RPP.
The report also revealed that rental tariff of 11 of 14 contracted RPPs ranged between 18 and 22.24 cents per unit, and one each of 15.60 cents, 9.5 cents and 8.5 cents per unit. The last three RPPs are based on gas and the others on furnace oil and hence could go up or down with fluctuation in oil prices.
“With a 14 per cent down payment and limited bank guarantee, major concern is that the RPP sponsor may abandon the project in the event that the plant runs into difficulties…In case for RPPs with five years contract, the sponsor would have recovered his investment in three years, he would have made comfortable return and still own the government part of the down payment. The seller could thus abandon the project rather than face penalties and the plant would not offer any collateral. It is noted that neither the request for proposal nor the rental agreement refers to the import policy order provisions on used/second-hand power plants.”
Credibility
The report said the credibility of the process also suffered because of inclusion of unsolicited proposals, especially based on gas because they were free to offer different fuels. However, to expect bidders to arrange for gas whose allocation is controlled and regulated by the government restricted competition. “If gas was available it should have been transparently included in invitations under the bidding. There is one unsolicited gas plant which has become effective.”
According to the report, the third-party review also highlighted the need to take an integrated look at the energy sector given that the current crisis to a large extent was fuel crisis caused by unexpected and unmitigated increase in furnace oil prices and delays in finding a substitute for depleting domestic gas supplies because gas shortage increased the cost of power and lowered efficiency and capacity for plants designed to run on gas. “The available gas needs to be optimised for maximum economic benefit.”
It said the report predominately relied on data and information provided by the government and its agencies and its findings were shared with the government during periodic reporting and consultation to confirm the direction of the study and facilitate early awareness and decision-making.