The Barnett Government will press ahead and complete the full refurbishment of the halted Muja AB power station project, arguing the decision is in the best interests of taxpayers.
Independent analysis by KPMG shows proceeding with the project will deliver $52 million of value over 10 years if the Government completes the project.
This analysis, however, assumes that $289 million spent to date is a “sunk cost”.
Energy Minister Mike Nahan this morning tabled two independent reports into the botched project, which was supposed to see Government-owned generating company Verve partner with Geelong engineering firm Kempe in a joint venture to rehabilitate the 50-year-old, 240MW Muja AB coal-fired power station in Collie.
The reports reveal there were serious flaws in the original business case pursued by the board and senior management of Verve Energy in 2008 and 2009, and that Kempe was a poor joint venture partner.
One of these reports, a project assessment by KPMG, found there was no methodical approach to applying a typical investment decision framework to the project.
KPMG found there were “material inadequacies in the development of the proJect ownership and financing structures”.
“While the project had the appearance of a 50-50 joint venture, the true value of each party’s contributions, combined with the contracting, financing and guarantee arrangements created and asymmetric risk profile between the parties, with Verve bearing a disproportionate share of the risks,” KPMG said.
“For a power project of this size, Kempe appears to have had limited experience and its financial capability was mismatched to the standing of Verve.
“Verve effectively unilaterally guaranteed all of the critical financing, third party supply and (electricity) offtake contracts underpinning this project.”
The project involved the refurbishment and return to service of four generation units.
Units 3 and 4 returned to service in February and March but units 1 and 2 were substantially delayed after undetected corrosion in boiler tubes led to a blowout, necessitating at least $60 million of repairs which fell outside of the scope of the joint venture contract and had to be met solely by Verve.
With the project apparently in crisis amid reports in The West Australian and attacks by the Opposition in Parliament, the State Government ordered Verve to halt further works on units 1 and 2 in June pending a review of the project.
The KPMG report considered two options: proceed with the boiler work repairs on 1 and 2 and complete the project, or “partially abandon” the project by abandoning works on 1 and 2 and continuing to operate 3 and 4.
The KPMG report found option 1, to proceed, would generate $52 million of value over 10 years compared to option 2, to partially abandon.
This does not, however, mean the project will be profitable over that time, with the analysis treating all costs and revenues to August 31 – which total $289.8 million – as sunk.
Dr Nahan said the Government had decided to follow the KPMG recommendation.
“The easiest thing for me to do politically would be to walk away from the refurbishment and leave it there, but that would not be in the best interests of WA taxpayers,” Dr Nahan said.
“The best interests lie with completing the project and selling down, as planned, 50 per cent of it (to the private sector) and allowing it to operate for another 10-15 years.”