Audit of IPPs

The differences between the Federal Ministry of Water and Power and Ministry of Finance over the payment of public money to Independent Power Producers (IPPs) in the guise of circular debt have escalated to new heights, becoming a subject of media and public focus. Khawaja Asif, the federal minister for water and power, has reportedly written a letter to Securities and Exchange Commission of Pakistan (SECP), expressing his concerns against the ministry of finance for their conduct of fast track payments to IPPs. It is reported that a payment of Rs 480 billion was made to IPPs within 24 hours in the guise of circular debt – a procedure which could take several weeks or even months in normal circumstances.

On the other hand, the Public Accounts Committee (PAC) of National Assembly has also termed the payment of Rs 480 billion circular debt to IPPs dubious and directed for a re-audit of payment. PAC, in its ruling, observed that circular debt was retired in haste without proper scrutiny of the claims of IPPs. The Auditor General of Pakistan (AGP) stated that the payments of Rs 341 billion to Pepco by Finance Ministry on account of settlement of circular debt without pre-audit by AGPR as prescribed by AGP was irregular. Pepco subsequently made payments to IPPs.

Also, AGP observed that Rs 31.7 billion paid as late payment charges to IPPs could have been avoided. Also, Rs 25 billion non-cash adjustment is termed unjustifiable. The government is reported to have ignored adjusting Rs 22.9 billion on account of liquidity damages. Moreover, it is reported that IPPs were further favoured when the government made another unjustified payment of Rs 18.5 billion on account of General Sales Tax. Additionally, a payment of Rs 32.5 billion was made on account of idle capacity, Rs 2.7 billion on account of capacity payment, Rs 264 million on account of open cycle, Rs 264 million on account of reimbursement of withholding tax on dividends and Rs 14 million was paid by applying higher inflation and wrong currency exchange rates.

In question is therefore a total of over Rs 165 billion paid to IPPs which is termed irregular by AGP. The government could have avoided making that unjust payment. This is a significant amount of waste considering the fact that our fragile economy is on the IMF crutches and other lending agencies and that half of the population is living below the poverty line with no education, healthcare and job opportunities.

The issue of circular debt escalated during the tenure of PPP government. The circular debt soared to Rs 460 billion in 2012 of which Rs 239 billion was paid to IPPs through bank borrowings. One reason for the escalation of the issue was that during this regime number of fuel oil- and HSD-based power plants were added to the grid – many of them with high oil bill and low efficiency. Also, the governance of the power generation and distribution companies deteriorated.

When PML-N government took over in May 2013, circular debt escalated to Rs 503 billion. The government paid it off under a pledge to the nation that with this payment the issue of circular debt will be buried forever and better governance will prevail in the power sector. This pledge was never honoured and the PML-N government now, after being nearly three years in office, could not overcome the menace which continues to cause more and more dents on the fragile economy of Pakistan.

Two factors primarily contribute to building up circular debt. The first is the operational, technical and financial conduct of the IPPs in terms of management and efficiency of power generation and the second is the operational, financial and technical conduct of the power distribution companies in the public sector related to management and efficiency of power distribution. The reoccurrence of circular debt every few months means that both are at fault.

While AGP conducted the financial audit of IPPs and brought forth to public knowledge the shortcomings, all hands are now up demanding a fair, full and comprehensive audit of the conduct of IPPs and the government functionaries associated with IPPs. This includes financial, operational and technical audit.

On the technical side, the tariff setting process of IPPs by National Electric Power Regulatory Authority (Nepra) and its subsequent monitoring constitute a complicated exercise which takes into consideration fixed and variable parameters. Its primary focus is on the capacity and energy charges; these are strongly characterised by a fuel component (inclusive of price of fuel, thermal efficiency – heat rate and caloric value of power plant – its aging and loading) and the plant operation and maintenance component and other financial, procurement and construction costs. There has been a recent demand by the government to carry out the audit of the heat rate of power plants. But the IPPs resisted it and managed to get a stay order from the court against it. It is reported that the government has not made any serious efforts to have the stay order vacated in the larger public interest.

On the operation side, there are many hot spots like the fuel supply chain, amount of fuel consumed which is a pass through, the plant idle capacity and its determination whether it is on account of government’s failure to pick-up power or due to IPPs’ fault which means penalty payments by the defaulter, the actual power off-take from IPPs on national grid and similar metering spots. Only a very fair and a professionally competent inspector or a regulator can ensure the true and honest application and transparency of the system.

There are basically three government regulators who are responsible for the conduct of IPPs. AGP is responsible for the financial conduct, which has presented to public the report of the financial audit of IPPs. Nepra is responsible to look after the interest of the investor and the public and strike a delicate balance between the two. It’s Nepra which is responsible to conduct the technical and operational audit of IPPs in the best public interest. It is reported that Nepra has declined to conduct the audit of IPPs for reasons not made public. If it is because of lack of technical competence then it could acquire external services for the same.

As most of these IPPs are public listed companies and the Securities and Exchange Commission of Pakistan (SECP) also has the responsibility to safeguard the interests of the shareholders and the state. As nearly all the IPPs are operating in double-digit profitability the shareholders are expected to be happy. But SECP also has the responsibility towards the state and has to do its bit to ensuring fair play. Up to now both the regulators – Nepra and SECP – are docile and appear reluctant to play their role judiciously and promptly.