Curious case of corruption allegations in Sahiwal Coal Power Plant

Curious case of corruption allegations in Sahiwal Coal Power Plant

By: Communicators - Business Team (July 13, 2024)

A significant development has taken place regarding the allegations of corruption in the energy sector, specifically concerning the overpriced import of coal for the Sahiwal Coal Power Plant. The Islamabad High Court (IHC) has taken a proactive step by demanding answers from the Ministry of Energy and the National Electric Power Regulatory Authority (NEPRA). Here are the key points of the issue:

• Alleged Corruption: There are accusations of fraud and collusion involving the Sahiwal Coal Power Plant and Awan Trading Company. The imports of coal are allegedly overpriced, leading to inflated electricity prices for consumers.

• Financial Impact: The alleged corruption is reported to have potentially exposed the national exchequer to a loss of Rs. 81.7 billion. This cost is expected to be borne by consumers, increasing their financial burden.

• Failure of NEPRA: The court documents suggest that NEPRA failed to fulfill its duties as outlined in the NEPRA Act. This includes not acting in accordance with specific sections of the Act, leading to public injustice and financial loss.

• Court's Action: The IHC has summoned official replies from the Ministry of Energy and NEPRA. This indicates that the court is seeking accountability and transparency in this matter.

• Public Impact: The issue highlights the broader implications for the public, who are directly affected by the increased electricity prices resulting from the alleged corruption.

The Sahiwal Coal Power Project scandal highlights the impact of inadequate procurement guidelines and the need for regulatory oversight in the energy sector.

Spot Procurement Issues in 2022

In July 2022, the Sahiwal Coal Power Project, along with other Independent Power Producers (IPPs), faced directives from NEPRA (National Electric Power Regulatory Authority) to source coal locally and regionally on a spot basis. This was primarily due to soaring exchange rates and difficulties in securing Letters of Credit amidst a US Dollar shortage in the country. This situation set the stage for exploitation.

Overpriced Coal Supply

Between July and December 2022, Awan Trading Co., a "preferred supplier," took advantage of the lack of strict procurement guidelines. The company supplied coal at rates 85% higher than the market price, meaning consumers paid Rs. 185 for coal that should have cost Rs. 100. This significant overpricing stemmed from the absence of robust procurement rules, leaving room for suppliers to exploit the situation.

NEPRA's Intervention in 2023

In response to the scandal, NEPRA introduced new spot purchase guidelines in January 2023. These guidelines created a more competitive environment, leading to a substantial drop in coal prices. From January to December 2023, suppliers offered discounts of 11-15%, allowing consumers to pay Rs. 85 for coal valued at Rs. 100.

Bypassing Regulations

Facing reduced margins due to the new competitive landscape, Awan Trading Co. sought to bypass these regulations. The company secured long-term contracts tailored to its commercial advantage, effectively circumventing the new guidelines meant to ensure fair pricing. This episode underscores the importance of stringent procurement policies and regulatory oversight to prevent exploitation and ensure fair pricing for consumers.

This situation illustrates a shift in procurement strategy at the Sahiwal Coal Power Project, favoring long-term contracts over spot-based procurement, with a substantial impact on market competition. The key points include:

• Long-Term Contracts: IPPs (Independent Power Producers) could source up to 90% of their coal from Awan Trading under these contracts, leaving only 10% for spot procurement.

• Tender Specifications: A tender issued on November 24, 2023, by the Sahiwal Coal Power Project introduced terms that effectively excluded most suppliers.

• Exclusionary Clauses: The tender required bidders to have imported at least 300,000 metric tons of coal via sea in the past year and specified the imports must be for trading purposes only. This excluded local and regional suppliers.

• Competition and Pricing: The restrictive clauses led to 99% of potential suppliers being disqualified, leaving only Awan Trading to win the contract with a minimal discount of 0.3%, compared to the 11-15% discounts offered by competitors.

• Criticism and Allegations: The move was criticized as collusive, aimed at benefiting Awan Trading, which had already profited from previous procurement practices.

This approach not only limits competition but also raises concerns about fairness and potential collusion in the procurement process. This situation highlights potential misconduct and unfair practices in the coal trading and power generation sectors. Here’s a summary of the key points:

1. Pre-arranged Contracts: Evidence suggests that Awan Trading loaded coal on December 13, 2023, even though the contract was only awarded on December 17, 2023. This indicates pre-arranged agreements aimed at providing collusive benefits.

2. Price Discrepancy: Awan Trading sold coal to Attock Cement at $111.71 per metric ton on a spot basis, while selling to Sahiwal Coal Power Plant at $113.20 per metric ton under a long-term contract. Typically, long-term contracts should offer lower prices compared to spot prices, but this case shows the opposite.

3. Unjustified Requirements: The requirement for sea shipments was described as “malalfide, unreasonable, and manifestly arbitrary. It was purportedly included to facilitate Awan Trading, exclude other competitors, and eliminate competition, ensuring a collusive arrangement between the coal power plant and Awan Trading.

4. Financial Implications: The court documents estimate that the 15 percent discount captured by Awan Trading could lead to an additional $300 million annually if similar contracts were executed by all four imported coal power plants.

These points suggest that Awan Trading and certain power plants might have engaged in practices that undermine fair competition, potentially leading to higher costs for consumers and significant financial gains for the involved parties through collusive agreements.

The petitioners contend that NEPRA neglected its duty to protect consumer interests, permitting inflated costs to burden the public. They are demanding an immediate cessation of the contract and the formulation of new regulations to ensure fair competition and reduced prices. The document states, “All the parameters were pre-meditated, preempted were farcical and set in advance, so that only Awan could qualify and then it could sell coal at exorbitant rates without any competition which it did.”

This scandal has significant implications for Pakistan’s energy sector. NEPRA has so far failed to issue any guidelines, constituting a clear dereliction of its legal, statutory, and constitutional duties. The regulator is obligated to ensure that tariffs or electricity prices are economically prudent and do not foster anti-competitive behavior, but rather promote competition. The Islamabad High Court (IHC) has given NEPRA and the Energy Ministry a one-month deadline to submit their official response to this case.