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From Pakistan, but applicable world-wide — Wind power: that’s another scam brewing up

Business Recorder — October 14, 2013

Although it is not known whether or not the government is seeking to steer clear of different brewing scams in various economic areas, it is quite clear that it has in fact encouraged a fraudulent scheme in wind power energy sector to swindle the national exchequer. According to sources, the ‘Letter of Intent (LoI)’ game, which is strongly characterised by conceit, deceit and intrigues, has become a convenient tool to inflict huge financial losses on nation’s kitty for the benefit of a few individuals.

Inquiries carried out by Business Recorder in the country and as well as abroad show how a wind power project works: an LoI is given by Government of Pakistan for interested parties to setup a wind project. Once the LoI is arranged, back door deals allow for some of the projects to get government land to the projects at few rupees per acre (cents per acre). Currently over 100 LoI are given whereas some 20-25 projects have been allocated government land. Only a couple of projects have acquired their own land.

“Once the land is available, a technical feasibility is done which involves 5 individual studies and total cost for doing these plus setting up the wind measurement equipment plus legal and Technical consultant comes to half million ($500,000) dollars and this is the total cost for the sponsor,” the sources said.

The following is a typical breakdown of a wind project in Pakistan, according to sources: 

Construction Contract or EPC (Engineering Procurement and Construction – ‘turnkey’ project) is a buzzword in energy circles these days.

EPC Contract involves procurement of Energy Equipment (wind turbines), setting it up on Site then commissioning of the project. Individually turbines cost around $47-$50 million, civil costs are around $8-$9 million and another $8 million are for setting up the electrical substation and transmission lines inside the site. These add up to $63-$67 million. EPC contractors charge another few million to cover their risks but the total Final “fully loaded” EPC cost should come to around $75 million.

However, as shown in the Table 1, the projects show their total EPC cost as $105-$111 million. The difference between the actual cost and the submitted cost is typically recouped. Project Company and the EPC contractor have a Contract that is submitted to the regulators and bankers and creditors that shows the amount shown in the Table 1.

However, there is a second contract – a typical side letter arrangement that provides the split of the recoup back to the Project Company and tech contractor, the sources added.

As EPC companies are part of the structure they realize that project company is taking cash out into their pockets, they ask for higher prices to $85-$95 million dollars (depending on the negotiations and allocation of risks) to share in the loot, the sources said and added that all international companies have local partners that help set up the arrangement.

Table 1 – submitted fictitious contract  Click here to continue

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