ISLAMABAD: The Securities and Exchange Commission of Pakistan has decided to probe into the alleged misappropriations by the Independent Power Producers (IPPs) while sources inside the SECP have revealed that recent examination of financial statements of IPPs indicated some glaring discrepancies.

The SECP decided to initiate inquiry in the affairs of the IPPs following complaints regarding issues to artificially inflate the production costs have been quoted by the complainant.

It has been alleged that the IPPs were involved in purchase of furnace oil with additional 3 -5 per cent mark up paid to guarantee cover, while the seller has back to back agreement to refund it back to procurers after retaining 0.5 per cent of this amount.

Meanwhile, an official of the SECP said that it has been observed in the initial inquiry that the operation and maintenance costs are exaggerated.

The Commission has initiated the inquiry after formal complaint by the Transparency International Pakistan (TIP), which provided information to SECP that private power producing companies are involved in fictitious loading of production cost to avail additional income as their final prices are determined by regulatory authorities on cost plus basis.

It was reported that more then 50 IPPs have been involved in this malpractice, and have been availing additional benefits for almost a decade.

“An amount of over Rs100 billion per year has been obtained by the IPPs through improper means,” TIP said, “This is because the sale prices are determined by the relevant regulatory authorities based on the productions costs submitted by these firms.”

Sources in SECP said that the inquiry would determine the monthly fee charges paid for Technical Services and Consultancy costs by IPPs.

“The inquiry has noted over-invoicing in the cost of material and goods procured,” the official said, “It has exaggerated input consumptions.”

The other main issues are subcontracting various operations at inflated costs, and back to back arrangements with subcontractors to refund 90 percent of extra payments mad.”

“The IPPs are reportedly making fictitious contracts, and material/goods purchase billings,” the official said.

Based on the analysis of financial information collected and the alert generated by TIP, SECP has devised a three pronged strategy to check the apparent misappropriations on part of the IPP.

Sources in the Commission said that the IPPs for the sake of meaningful comparison, were divided into five sub-groups on the basis fuel used namely, furnace oil, low surplus furnace oil, natural gas, low BTU gas and hybrid.

“The resultant analysis has raised many red flags in terms of reduced capacity revenue per kilo watt hour, abnormal consumption of stores and spares, unexplained and disproportional repair and maintenance costs and huge legal and professional charges.”

“The initial inquiry by SECP has also raised question marks on the apparent inefficient utilisation of fuel resulting higher energy fee to be paid to these IPP by the Government,” the official said, “Abnormal administrative expenses have also been identified.”

Some of the IPP producing electricity on natural gas had abnormal low gross profit margin as compared to other IPP enjoying high GP margins and using gas as fuel source.

The initial inquiry has also revealed that inverse relations between dispatch level and sales were also identified. Abnormal net losses before tax made by IPP were identified and apprehension is that the operational losses and finance cost of these IPP had risen disproportionately.

As the enquiry proceeds, an inspection order has been issued in case of one listed private power producer the ‘in-house’ inspectors appointed by SECP shall look in depth at the matter of reduction in capacity revenue per KWH, factors and reasons contributing to the gross loss incurred by the company.

“The inspector would also verify the consumption of stores and spares and increase in repair and maintenance costs as well as legal and professional charges,” the official said.