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Shocking report on how private firm made 14.8bn profit by selling power
An independent power producer (IPP) selling electricity to the national grid since the early 2000s had by March 2021 made a net profit of Rs 14.8bn amounting to 855 percent of its initial investment, a Government audit has found.
From 2005 to 2015, the Aitken Spence-owned ACE Power Embilipitiya (Pvt) Ltd earned a net profit of Rs 8.57bn or 511 percent of its initial capital of Rs 1.67bn. The company’s profit during 2005-2007 alone totaled Rs 1.8bn. This meant that its payback on investment was just two years. (Net profit is gross profit minus the cost of business operations and non-operations).
But the Ceylon Electricity Board (CEB) continued buying electricity from ACE Power not because of a lack of supply to meet average demand or due to “an urgent requirement”. It did so because the utility had not implemented a middle and long-term power generation plan; and as a means of addressing deficiencies in its transmission grid, a damning special report from the National Audit Office (NAO) also revealed.
The 103MW ACE Power thermal plant is run on heavy fuel oil. It was built as a Board of Investment project costing US$ 61mn, of which 70 percent was loan-funded. The company put in US$ 18mn as equity (the agreement places return on equity at between 17 and 28 percent). The Government had no direct financial input. The CEB signed a 10-year purchase agreement with ACE Power effective from 2005 to 2015. The audit questioned why, even after Cabinet in 2016 granted approval for the CEB to purchase the plant after the contract ended, this was not done.
Instead, the initial power purchase agreement was extended for five years and six months from April 2016 to September 2022—even when it would’ve been more beneficial for the CEB to have acquired the plant. ACE Power’s net profit from 2016 to 2021 alone was Rs. 6.81bn.
The opportunity to buy the plant was lost when the Government Valuer cited a price lower than what the company quoted. The NAO faults the official assessment of Rs 2.37bn and says it was closer to Rs 4.17bn (the company cited Rs 2.4bn). Had there been an undervaluation, it recommends that the responsible parties be identified and action taken.
Under its deal with ACE Power, the CEB granted the company a capacity fee that covered the payment of loan instalments, cost on loans, return on equity capital and insurance as well as administrative expenses, fixed charges, maintenance and others. The CEB separately met energy charges comprising ratio of fuel, ratio of fuel transportation and non-fuel component.
The utility also paid interest on any late disbursements it made. Accordingly, it dished out Rs 580m during the 10-year contract as interest for delays and Rs 1.36bn during the five-year extension. The CEB could have “achieved a more favourable status either by investing loan capital under the current financial position or by taking action to purchase the power plant”, the NAO states.
The CEB also reimbursed all of ACE Power’s tax expenses. The company had claimed Rs. 4.78bn during the initial 10-year agreement and Rs. 1.49bn during the extension. By retaining these same conditions when ACE Power was contracted again after 2016, “the tax to be paid to the Government by a private company had been paid by a Government institution, thus depriving the Government of the actual tax revenue to be received”.
The report provides insight into how, instead of addressing core shortcomings in electricity supply to the South—the area ACE Power catered to—the CEB repeatedly sought to renew the company’s contract as a means to ensure uninterrupted service. Nearly 60 percent of electricity demand in the South is met by the private sector.
From 2016 onwards, the CEB requested the regulator, Public Utilities Commission of Sri Lanka (PUCSL), to authorise urgent electricity purchases. The utility on at least seven recorded instances pushed for the agreement with ACE Power (and the Aust-Asia Energy-owned ACE Matara) to be renewed on the pretext of “existing issues in the power grid in the Southern region”.
But those issues were that four transmission lines “had not been timely completed for strengthening of the power grid in the Southern region”. There was, therefore, a delay of over five years to connect these lines to the grid.
The NAO has highlighted how laws were violated in the ACE Power case. For instance, Cabinet approval was granted to extend the contract although—in contravention of the Sri Lanka Electricity Act—the company had not obtained a generation licence for 2016-2021 from the PUCSL.
After 2013, there is also no provision for companies with 100 percent private ownership to operate plants of over 25MW. But the extension agreement was signed with ACE Power which is completely privately-owned.
The NAO has not gone into the CEB’s purchase agreements with other IPPs.
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