Those whove took the course called Negotiations and Collective Bargaining at business and public policy schools would know what penalty means. For those who haven , here is a basic definition: penalty is an action - usually the payment of a sum of money - required as a forfeit for an offense, with the intension to discourage that particular offense.
But what would one call penalty clauses that fail to achieve the purpose, and instead, when seen in conjunction with other contract clauses, encourage the very offense they are supposed to prevent.
In the absence of a proper word, lets call it the RPP-factor, as ADBs audit report reveals that the government has imposed no penalty, if the contractors of rental power produce lower than contracted electrical output.
Penalties for not meeting the contractual performance at all exist, but they would be charged to future rental payments. But this is risky for the buyer - i.e. the tax payers - in case the seller abandons the contract. After all, with just 14 percent down payment, RPP contractors have limited equity risk in the project.
For instance, if a 5-year project fails to produce agreed-upon output in its third year and the government imposes penalty on future rental payments, the contractor can just pack up and leave because his investment would have been recovered by that time, according to ADBs analysis.
Similarly, penalties on late commissioning of the project are either supposed to be recovered from future rental payments (which is again a very-seller friendly clause) or from the performance guarantee provided by the contractor. But when the amount of guarantee is insufficient to cover the chargeable penalty, then whats whole point of inserting the clause to deduct penalty from it.
A more important issue, however, pertains to the wisdom of the inviting RPPs in the first place. ADBs report confirms what local media had been decrying for long: the expensiveness of the projects.
Being about 12 percent costlier on an average, the RPPs are certainly not the least cost options as outlined by the Power Policy 2002. In fact, had the government resolved contractual and administrative issues while providing gas supplies to the system, up to 1000 megawatt of energy deficit could have been plugged.
That and timely implementation of ADB-funded CFL electricity bulbs programme to manage demand could have cumulatively squeezed the countrys energy shortfall by around 2220 megawatts.
* This is the second part of our continuing coverage on how rental power projects form a classic case of mismanagement on the part of the government.
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RPP Max. Penalty Performance
$ (mn) Guarantee $ (mn)
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Reshma 6.579 1.1
Ruba 5.09 0.85
Kamoki 2.398 0.3698
Sialkot 1.87 0.425
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Sources: ADB analysis of RPP contracts
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