Jahangir Tareen makes excess profits of Rs 4bn in Baggase-Based Power Plants: Report

ISLAMABAD: After sugar scandal, Jahangir Tareen has also allegedly been implicated with power sector scam who is said to be a beneficiary for making excess profits of over Rs 4 billion due to flawed co-generation power policy.

The audit committee headed by former chairman Securities Exchange Commission of Pakistan (SECP) had found that JDW along with other three power plants had made profits in excess due to capacity factor of power plant and miscalculation of Internal Rate of Return.

According to newztodays, the committee said that since the IPPs under review had produced electricity in excess of 45% plant factor, excess gains were made by the IPPs.

Total excess profits were Rs 6.3 billion due to capacity factor. JWD sugar mills owned by Jehangir Tareen made excess profit of Rs 4 billion, RYK Mills Limited Rs 1 billion and Chiniot Sugar Mills Rs 1.34 billion.

In addition to excess profits made due to capacity factor, excess profits were also made by these bagasse based power plants to miscalculation of Internal Rate of Return (IRR).

In monetary terms, this works out to extra earning for the IPPs of Rs 0.26 billion during the last 3-5 years of their operations, i.e. the period under review. It is projected that these four IPPs will earn an additional Rs 4.62 billion by the end of their respective contract periods as excess RoE, assuming that USD appreciates against PKR at an average rate of 6% per annum. In total, an excess of Rs 4.88 billion will be earned by these four projects during their project life.

Chiniot Power Limited will earn Rs 2.10 billion, RYK Mills Limited Rs 1.17 billion, JDW-11 Rs 0.90 billion and JDW-111 Rs 0.72 billion.

The tariff is assumed an Annual Plant Capacity Factor (“APCF”) of 45% on the basis of 180 days and plant availability of 92% for Co-generation projects. NEPRA had originally assumed a 50% APCF. However, Pakistan Sugar Mills Association (“PSMA”) in its presentation to NEPRA in the hearing objected that 50% APCF as proposed by the Authority was not achievable based on the period of sugar cane crushing season and bagasse availability to the sugar mills during off season for power generation.

PSMA submitted that actual crushing season in our country lasts for 100-110 days, therefore, adjusting for shorter crushing season in our country, the realistic APCF for Co-generation projects works out to be around 40% which may be considered by the Authority. Examples of neighboring country was provided where regulator has fixed APCF of 45% based on 180 days (120 days crushing season and 60 days off season).

Accordingly, NEPRA granted raise in the base tariff due to change in APCF from 50% to 45%. ii. Based on the APCF of 45%, annual energy of a capacity of 1 MW (91.5% net capacity after auxiliary load) arrives at 3.607 GWh (IMW x 91.5% x 45% x 365 days x 24 hours), which was used by NEPRA in the calculation of fixed cost components, RoE and debt service cost when determining the tariff.

The operational period for 4 of the 8 Bagasse IPPs was less than three years, and for 2 projects it was less than one year. This was insufficient to review the profitability of these projects holistically. Therefore, the 4 operational co-generation projects were reviewed which have been operational for more than three years.

The committee in its report said that a comparison of the Adjusted Profit with the allowed RoE as per the information provided by CPPA-G showed that there were material excess profits made by JDW. The reasonableness of tariff determination was also reviewed to identify the causes of these excess profits. In this regard, the assumption of plant factor of 45% used in the tariff determination was corroborated with the actual plant utilization (annual Net Electrical Output) as per the information provided by CPPA-G. A similar comparison was also conducted for RYK Sugar Mills Limited Bagasse Power Plant and Chiniot Power Limited.

Findings of detailed review excess profitability: IRR miscalculation

NEPRA had allowed a return to the Bagasse IPPs based on 15% USD Equity IRR to be paid annually. In reality, the IPPs are paid their CPP on a monthly basis by CPPA-G, which includes RoE. Because of this mismatch between the timing of payment for computation of IRR, the IRR earned by these IPPs is higher than the IRR allowed by NEPRA, i.e. 18.39% return instead of the allowed 17% return.

In monetary terms, this works out to extra earning for the IPPs of Rs. 0.26 billion during the last 3-5 years of their operations, i.e. the period under review. It is projected that these four IPPs will earn an additional Rs.4.62 billion by the end of their respective contract periods as excess RoE, assuming that USD appreciates against PKR at an average rate of 6% per annum. In total, an excess of Rs. 4.88 billion will be earned by these four projects during their project life, details of which are tabulated below:

Excess profitability: Fixed costs and debt service costs

The Bagasse power plants under review were producing electricity in excess of the plant factor used by NEPRA for tariff determination. Payment of fixed costs, i.e. fixed O&M – local, working capital, insurance, etc., as well as debt service cost is linked with the plant factor which was determined at 45% in the tariff determination. The electricity generation in excess of 45% plant factor therefore leads to excess payment on account of fixed cost and debt service cost, which is included as a revenue of the IPPs, resulting in excess profits. Since the IPPs under review have produced electricity in excess of 45% plant factor, excess gains were made by the IPPs.

It may be noted that the CPPA-G has taken notice of this issue and during 2018, CPPA-G has initiated adjusting/deducting the excess payments made to these four projects. However, the IPPs have challenged the action of CPPA-G in the Islamabad High Court and are claiming that excess gain on account of plant factor is their right. The Honorable Court has referred the case to Secretary, Power Division and a decision in the matter was still pending at the time of submission of this report.

The financial statements of these IPPs were reviewed and, as discussed earlier, their returns were adjusted to arrive at an Adjusted Profit generated from operations in line with the review methodology, which was then compared with the allowed RoE.

In the case of JDW Sugar Mills Limited and RYK Mills Limited, the main business of the companies was other than power generation, therefore, all required information pertaining to power generation was not available in their financial statements. Further, in case of Chiniot Power Limited, financial statements for only the first two years were available, consequently it was not possible to analyze the financial statements in detail. However, the collective Adjusted Profit pertaining to projects JDW-II and JDW-III (“JDW”) were determined by using information reported in the Group Reportable.

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