Top auditor reveals losses of Rs50b in rental power deals

AGP observes that policy to meet the energy shortfall was launched in haste and is likely to fail in its objectives.

ISLAMABAD: The Auditor General of Pakistan (AGP) has worked out a colossal loss of over Rs50 billion from six deals of the controversial rental power plants and observed that the policy to meet the energy shortfall through rental plants was launched in haste and is likely to fail in its objectives.

Incidentally, the losses are equivalent to the amount the government wants to collect through a flood surcharge on all income groups.

The office of the Auditor General of Pakistan scrutinised six deals of the rental power plants, two of which were signed during the last regime. Of the six, one contract was irregularly awarded, three awarded without competitive bidding and in one case the qualification criterion was changed to suit the favourite. It was also revealed that the government provided extra contractual financial assistance to four power sellers by borrowing from banks, sustained losses of millions of rupees, paid heavy penalties and incurred imprudent expenditure, resulting in losses of Rs21.5 billion.

The first detailed AGP report on the rental power plants upholds the findings of the special report of the Asian Development Bank (ADB) on these plants. The ADB report also highlighted many loopholes in the shabby deals, termed the contracts in favour of the sellers and highlighted constant financial constraints on the already limited resources as the government is likely to pay approximately $5 billion (Rs430 billion) in rent in five years.

After public criticism, the government had requested the ADB to carry out an audit that recommended the installation of eight power plants on the grounds that the deals were at an advanced stage, called for considering dropping six of them taking into account their financial obligations and dropping five once and for all.

The most startling revelation in the audit report, which was completed in June 2010, was that the authorities, who were desperate to sign the rental power plant deals, paid billions of rupees in rent up front instead of utilising the same amount to recoup the lost capacity of existing power plants.

The audit found that the authorities signed three rental agreements for 211 megawatts of energy supply, two of which were with Walters Power International for a cost of $300 million. Around $35.8 million was paid in advance whereas the amount could have been utilised to recoup 245MW of lost capacity in the thermal power station at Guddu, the AGP reports. Besides adding to generation capacity, this could have saved Rs21.5 billion in the medium term.

The government also awarded an irregular contract to Techno Engineering Services for setting up a plant at Summundri, Faisalabad. The audit has reported the Techno Engineering Services Limited offered two options with two different set of machinery and tariff rates. The government picked the machinery of option one and paid the rate of option two which has resulted in an excessive payment of approximately a rupee per unit, amounting to losses of Rs3.2 billion over the period of electricity purchases. The audit department took the matter to the ministry of water and power in February 2010 but the ministry did not bother to reply. The contract was awarded in February 2008.

Without competitive bidding, the government awarded contracts to three companies that caused a massive loss of Rs8.5 billion. Findings showed that the government awarded contracts to Alstom Power Rental and General Electric Energy at rental charges of 3.133 cents per unit without inviting tenders in September 2006. The rent was higher than what would have been had the contract been awarded on the basis of open bidding and caused a loss of Rs5.5 billion.

In another similar case in April 2009, the incumbent government awarded a contract to Walters Power International for establishing a rental power plant at Naudero, Larkana. The audit has discovered a loss of Rs3 billion on this account only. The AGP has demanded an investigation into these three deals and the pinpointing of responsibility for causing losses to the national exchequer.

In a clear case of nepotism, the audit disclosed that the government awarded a contract to Young Gen Limited for setting up a 200MW power plant in Faisalabad. In March 2008, the government had invited bids for a 200MW power plant and required that the company should have a turnover of Rs200 million during the last three years. On April 15, 2008, the criterion was changed to owning a company worth $20 million instead of the Rs200 million turnover. April 15 was the day Young Gen Limited started its business. The audit labelled the $111 million transaction as irregular.

The government committed to providing gas to two rental power plants for electricity generation. The supply was disconnected later but the government paid a rent of Rs5.8 billion to Alstom Power Rentals and General Electric Energy without buying a single unit of energy.

The government also provided extra contractual financial assistance to four parties and itself sustained Rs236 million in losses on account of interest payments to banks. The government also entered into negotiations with these parties, which was in violation of public procurement rules.

Moreover, no feasibility study was carried out to implement the policy of meeting energy needs from rental power plants “with the result that the (defunct) Pakistan Electric Power Company had to face technical as well as financial problems during the award and execution of the rental power plants”. The audit also complained that the government did not cooperate in carrying out the audit and provided incomplete records relating to awards of rental contracts and minutes of the meetings.

Published in The Express Tribune, October 3^rd, 2010.