West Coast Power Ltd, a subsidiary of Lanka Transformers Limited, believes a recent report by Verite Research, a Colombo-based think-tank recruited by the Government to study recent proposals to build a 300MW combined cycle power plant in Kerawalapitiya, is biased and unprofessional and rejected all allegations levelled in the report. The Verite Research report titled ‘A case study of public sector loss through partnership structures in power generation contracts’ was critical of a power-purchase agreement signed in January 2007 between the CEB and West Coast Power Ltd, which is the operating company of Lakdhanavi.
Explaining the background to the power project and formation of West Coast Power Ltd, the company states as follows: Ministry of Power and Energy (MOPE), in order to avoid a definite power crisis forecast for 2008, in January 2006, instructed Lakdhanavi Ltd to submit a proposal to build 300MW Power Plant on a turnkey basis. Two other foreign companies also submitted proposals. The Lakdhanavi proposal was accepted by government.
The Ministry of Finance, however, advised MOPE to restructure the project to Independent Power Producer (IPP) basis and Lakdhanavi to invest in equity of the Project taking as the base the approved turnkey proposal. A revised IPP based proposal was presented to MOPE and MoF by Lakdhanavi in July 2006. Cabinet approved this proposal. At this point, the project company was expected to be a subsidiary of Lakdhanavi.
It was decided to name the new company as West Coast Power (pvt) Ltd (WCPL) and it to build, own and operate the power plant. Power Purchase (PPA), Implementation (IA) and Fuel Supply (FSA) Agreements were signed with WCPL by CEB, GoSL and CPC respectively in January 2007 for 25 years.
At the same time WCPL was negotiating an offshore debt of USD. 206M from HSBC- Hong Kong. HSBC wanted sovereign guarantee as collateral due to the situation which prevailed in the country.
This was approved by the Cabinet in September 2006. EPF, LECO, and Lakdhanavi agreed to provide equity directly to the WCPL. ETF and NSB agreed to provide funding to Lakdhanavi against a GoSL guarantee to make up required equity in the project. These were approved through a cabinet decision in November 2006.
In order to provide the guarantee to HSBC, as per Foreign Loans Act, WCPL had to have 50% ownership by GoSL. In April 2007, the Attorney General opined that Lakdhanavi is a private company and hence WCPL will not be eligible to get a GoSL Guarantee if it holds 50% of WCPL. By this time project was well underway.
Thus, the entire shareholding structure had to be changed whereby GoSL will replace Lakdhanavi as the 50% shareholder of WCPL. Lakdhanavi agreed to transfer its shares to GoSL.
However, a major issue came up when, even with that transfer of shares, GoSL would fall short of 50% of WCPL shareholding. To bring GoSL to 50%, out of Lakdhanavi’s own funds, Rs. 941M also had to be transferred to GoSL. Lakdhanavi refused to agree to this since it would have meant an immediate write off of Rs. 941M out of its assets.
After a large number of discussions with MoPE and MoF, Lakdhanavi agreed to transfer the Rs. 941M to GoSL on the basis that it will receive the residual of the GoSL’s dividends (after meeting loan obligations towards NSB and ETF) as return.
Lakdhanavi, offered to provide encashable bank guarantees to the full value of the residual dividends to be paid to it by GoSL. Based on this a Share Transfer Agreement approved by Cabinet in May 2007 was signed in July 2007.
The power plant’s open cycle phase was successfully commissioned in November 2008, thus avoiding the power cuts in Sri Lanka. WCPL is repaying HSBC debt of its own as scheduled and by now 75% of the debt is paid. It pays dividends to EPF, LECO and Lakdhanavi based on the shareholdings. It directly makes repayment and interest to ETF and NSB. If there is a residue, for that amount Lakdhanavi provides a bank guarantee to GoSL valid till 2022 and payment is made to Lakdhanavi. This entire process is done as approved by the Cabinet and as stipulated in the Share Transfer Agreement.
As per this Share Transfer Agreement, 9.41M shares purchased by Treasury will return to Lakdhanavi in 2022 when the GoSL guarantee is returned by HSBC.
After that, the residual dividend payment will stop and Lakdhanavi will have 13.3% shares and GoSL will continue to have 41.4% shares. After 2022, GoSL will receive dividends for these shares since WCPL would have fully settled ETF and NSB by then.
This situation will continue until the power plant is transferred free of cost to CEB in 2035. GoSL, due to the situation prevailing at that time in the country agreed to provide the Guarantees to HSBC to obtain the debt and dire requirement of the power plant, without expecting any return. The Share Transfer issue came much later and it should not be viewed as a trade off of risk and return.
Only shareholding of 8.5% (not a majority) will be transferred in 2022 to Lakdhanavi for which it paid in 2007. Further, unlike any other situation where GoSL guarantees are given, GoSL will earn a solid dividend stream from 2022 onwards from WCPL, for 41.4% of its shares.
It is our expectation it will be worth at least Rs. 28B. Lakdhanavi cannot enjoy the residual dividend it has received so far as distributable income since it is subject to a Bank Guarantee on them. For all residual dividend it gets there is an equal liability to GoSL. When Lakdhanavi started construction of this power plant in 2007, neither equity not debt was in place. It signed multi-million dollar contracts with companies such as GE, ABB to ensure power cuts in 2008 are avoided.
The Researcher has shown his poor knowledge in calculating cost comparison of electricity tariff by making a serious mistake.
It assumes all types of generation, be it hydro, wind, coal or HFO should have same unit costs. This is the fundamental error in these figures. Thermal Power Plant obviously will take of bigger stake of CEB’s total cost than a hydro power providing same amount of energy. It is true for all thermal power plants.