ISLAMABAD: The nine-member committee headed by ex-chairman of SECP Mohammad Ali which was earlier constituted by Prime Minister Imran Khan on August 7, 2019 has unfolded startling disclosures in its report recently submitted with the top man of the country that under the 1994 power policy, 16 out of 17 IPPs, which invested a combined capital of Rs50.80 billion, have so far earned profit in excess of Rs415 billion, having taken out dividends in excess of Rs310 billion.
According to the report, whose copy is available with The News, most of these IPPs had an investment with payback period of 2-4 years, and the profits generated were as high as 18.26 times the investment and dividends taken out as high as 22 times the investment. Six companies earned an average annual Return o Equity (RoE) between 60 to 79 percent and four companies earned RoE of around 40 percent. These profits are probably unheard of in any other sector, especially with such low level of risks and guaranteed payments by the government.
The report has also recommended to the government to shift the base tariff for IPPs from US dollars to Pak rupee and finish ‘take or pay’ contracts and start the move for take and pay contracts. It also recommended for establishment of Commission for Forensic Evaluation and Legal Audit of all IPPs. The report also suggested to the government to consider the retirement of GENCOs, as well as IPPs that were established as per the 1994 and 2002 power polices. About the menace of circular debt in power sector, it also asked for one time absorption of circular debt stock to the public debt, ensuring it is linked with quantifiable and accountability mechanism whereby future savings due to reduced cost of generation and other measures outlined in this report are used to pay back this one-time payment.
According to the report,13 residual fuel oil (RFO) and gas based plants with combined capacity of 2,934 MW were established under the power policy of 2002 and during the last 8-9 years of operation, these companies have so far earned profits of Rs203 billion against their combined investment of Rs57.81 billion. Even after adjusting for debt component to arrive at the true profitability, the company still earned Rs152 billion in profit and made dividends payments to the tune of Rs111 billion.
The report also mentions that the individual profitability among these companies also varies, with some showing a much higher profit to investment ratio than others, with the average RoE as high as 87 percent, profits of around 9 times and dividends up to around 7 times their investment.
So much so, the profitability of two imported coal based plants established under power policy of 2015 shows that one of them has already recovered 71 percent of investment in only two years of operations and the other plant has already recovered 32 percent of its investment in the first year. The plants have been offered USD internal rate of return (IRR) of 17 percent, which works out to USD RoE of 27 percent. Due to rupee devaluation against US dollar in the last two years, their Rupee RoE today stands at 43 percent.
It also point outs that significant percentage of these profits have been earned on account of misreporting by the generation companies while seeking tariff from NEPRA and misreporting by the generation companies while seeking a tariff adjustment at the time of commercial operation date (CoD). In the case of IPPs, established under the power policy 2002, it is found that a major component of excess payment to the IPPs were on account of the actual fuel consumed to generate the electricity being less than the payments made by the purchaser in lieu of the use of such electricity. Similarly, actual O&M expenses incurred by the producers were less than the payments received under this head. Total excess payments made under these and other heads works out to Rs64.22 billion during the last nine years with expected future excess payables of Rs145.23 billion during the remaining years of operations bringing the total excess payments of Rs209.46 billion to these plants.
It was also noted that while determining tariff for RFO based IPPs, NEPRA had approved their heat rate on the basis of information provided by the respective IPPs. The actual heat rate was submitted by one of the IPPs which has consistently operated at high efficiency level than those submitted to Nepra. The report also highlighted saying that O&M component of the tariff was based on the estimates provided by the IPPs, which was consistently higher than the actual expenses incurred and this also holds true in case of most of the IPPs.
And to this effect, excess set-up cost of Rs32.46 billion was allowed to the two coal based plants due to misrepresentation by sponsors regarding interest during construction (IDC) as well as non consideration of earlier competition of plants by NEPRA. These plants were completed within 27 to 29 months. However, IDC was allowed for 48 months as a result, one of the plants, Huaneng Shandong Ruye (Pak) Energy HSR, commonly known as Sahiwal Coal power plants, was entitled to an excess RoE of USD 27.30 million in annual payment of return which is indexed to USD and will be made every year over the entire project life of 30 years. If a 6 percent annual Rupee depreciation is assumed, the excess payment over the project life has been worked out to a total of Rs291.04 billion.
Under the 2013 framework for coal generation, eight bagasse-based power plants were set up with a total capacity of 254MW. At the time of tariff determination, Pakistan sugar mills association reported a net annual plant capacity factor (NAPC) of 45 percent, which was used by NEPRA to recover fixed cost in tariff determination. However, the bagasse power plants under review were operating at higher than 45 percent NAPC and were therefore being paid for fixed cost, and debt payment which was higher than their actual expense and liability and this has led to excess payments of Rs6.33 billion to the four baggase power plants so far.
The report also mentions the bitter fact that the power houses had shown their true up costs with additional increase of Rs2-15 billion to manage the higher tariff from National Electric Power Regulatory Authority. And more importantly the cost of coal based power plants was artificially increased by Rs30 billion. However, apart from NEPRA, other relevant institutions did not get verified the cost of the power plants independently through any third party.
The report further says that the power purchase agreements with entrepreneurs of power houses were inked on ‘take or pay’ basis under which the government has paid billions of rupees in the head of capacity payments even in case power houses are non-operational or the electricity demand is reduced. In the ongoing financial year, the government has to pay Rs900 billion to power houses in the shape of capacity payments whereas the government will have to pay Rs1,500 billion in 2025.
Such agreements have caused huge loss not only to national exchequer but also piled up an unprecedented financial burden on masses. Now the government with an ailing economy is unable to pay capacity payments more. And to pay the capacity payment, the government will be left with no option but to increase the power tariff to unimaginable levels. The report also says that power houses factually use less fuel and earn more profit which is unjustifiable.