20000418

Hubco rebuttal on audit report

'Part of Wapda

campaign to bias

readers' minds'

KARACHI: The Hub Power Company has responsed to the news item entitled 'Audit detects gross irregularities in Hub Power Company,' which appeared in Business Recorder issue of Saturday, April 15.

Hubco says: "The Audit report to which the newspaper report relates was a "special audit report on Power Purchase Agreement (PPA) with Hubco," published by the Department of the Auditor General of Pakistan in August, 1998. The report is, therefore, 18 months old. When the report was first published the Hubco made a presentation to the Special Finance Committee of the National Assembly at which all the points, raised in the executive summary of the report which appears in the newspaper article, were comprehensively rebutted.

"The Auditor General confirmed that the report was based on information and documents provided by Wapda and other government agencies. He also confirmed that the Hubco was not asked to participate in the audit and was not given an opportunity to answer any of his findings. He agreed that it was possible that his conclusions were based on incomplete information.

"The appearance of this article is not a coincidence but is part of a media campaign being orchestrated by Wapda whose purpose is to bias the minds of the readers. Interestingly, Wapda has also filed a copy of the Auditor General's report in the Supreme Court on 14th April on the eve of the resumption of the hearing in the Supreme Court.

"In respect of the content of the report, Hubco denies that the project cost was higher than similar Wapda projects. In fact, the cost of comparable Wapda projects would be higher because of inefficiencies and delays. Hubco denies that its project costs are 33.4 percent higher than the cost incurred by AES. Hubco denies that its project costs were 133 percent higher than a Syrian project. In fact, the Hubco project cost is 38.6 percent lower than the Syrian project quoted in the Auditor General's report.

"Hubco denies that its project cost is US $ 1637 million and that is tariff is based on a project cost of US $ 1637 million. The fact is that the Hubco tariff is based on a fixed cost of US $ 1521 million. In annexure 2 of the Letter of Intent (LoI) it is clearly stated that the cost of US $823 million was based on the initial assumptions provided by the sponsors in 1988. A LoI is a preliminary understanding of parties who intend to enter into a contract. As a result of a subsequent detailed feasibility study, the project cost was re-calculated at US $1277 million which formed the basis of a tariff agreement signed in May 1991 based on March 1991 exchange rates. The final tariff agreed in September 1994 was based on a project cost of US 1521 million. A comparison is given below:

Tariff Agreement Tariff Agreement Difference

1991 1994

US Dollars million US Dollars million US Dollars million

Construction 863 1,046 183

Contract

Finance & 414 422 8

Other costs

Reserve Account 0 53 53

Total 1,277 1,521 244

March 31, 1991 September 1994

Exchange Rates Exchange Rates

"The increase in the construction contract was on account of the relative change in exchange rates, in particular the cross rates between the US dollar and the Japanese yen and price escalation agreed by the GoP. The other major change was the introduction of the Reserve Account which was a requirement of the Lenders.

"Delays in starting the project were due to reasons outside the control of the Company. These included changes to the plant specification by Wapda, requirements of the World Bank and Lenders, the Gulf War, the Riba judgement, and the frequent change in the Government.

"The LoI only allowed the plant to be transferred to Wapda in the event that the power station was to be converted to coal burning and not otherwise.

"The Company confirms that it paid US$ 10 million as a penalty to the Contractors due to the delay in the release of mobilisation finance by NDFC, but denies that it has received or will receive more than that from Wapda. In fact, Hubco calculates that it has lost US $ 8.3 million as a result.

"Wapda alleges that BEI/National Power was member of the Construction Consortium and supplied equipment worth US $ 36.108 million. In fact, BEI/NP was never a member of the Construction Consortium and no equipment has ever been supplied by BEI/NP under the contract.

"The PPA was amended to make it open-ended, on the contrary it was amended to make the cash flows more certain.

"Hubco produces and sells electricity at a lower cost than Wapda. This was always the expectation of the Private Power Policy and it happens to be the reality. Hubco completed the project on schedule and within budget, unlike the Wapda project which are invariably late and over budget. The plant is operated up to 30 percent more efficiently than comparable Wapda plants. As a result, the electricity produced and sold by Hubco is cheaper than that produced by comparable Wapda plants.

The Company denies the Auditor General's findings and states that there were no irregularities in the project."ÑPR