Defunct ethanol plant losing millions of dollars a year

The plant incurs costs of VND120 billion ($5.12 million) each year in interest on loans, VND90 billion ($3.84 million) in depreciation, and VND52 million ($2.22 million) on maintenance, the State Audit Agency says in its latest report about ethanol project in the southern province of Binh Phuoc.  

Work began on the Binh Phuoc Ethanol Plant in 2010 with an initial investment of VND1.49 trillion ($63.6 million) and a designed capacity of around 102 million liters of E5 petrol per year.

Orient-Bio Fuel JSC (OBF), a joint venture, was the project investor. The JV was formed by state-owned PetroVietnam Oil Corporation (PV Oil), private construction firm Licogi 16 JSC and Japanese conglomerate Itochu Group.

The plant began operating at the end of 2012, but was closed down the following year because production was not profitable.  

According to State Audit, when PV Oil submitted the project’s investment policy for approval to its parent corporation, the Vietnam Oil and Gas Group (PVN), there was already 76.5 million liters in surplus production at all existing ethanol plants combined.

However, OBF decided to go ahead with Binh Phuoc Ethanol’s construction after PV Oil committed to buy 100 percent of the plant’s output at a price calculated based on the cost of cassava chips, the main input material for the plant.

When PV Oil reneged on its commitment to consume 100 percent of output the plant suspended operations in 2013 because further production would only result in losses.

The State Audit agency estimates that VND207 billion ($8.84 million) worth of state capital invested in the project was lost at this point. In the following years, the plant went on to incur losses of around VND262 billion ($11.25 million) per year in loan interest, depreciation, and maintenance.

By the end of 2018, the plant had lost around VND1.28 trillion ($54.63 million) and OBF had lost all its invested equity of around VND660 billion ($28.17 million), to which PVOIL had contributed VND198 billion ($8.45 million), Itochu Group VND339 billion ($14.47 million) and Licogi 16 VND122 billion ($5.21 million). 

At this point, the joint venture was no longer able to pay principal or interest totalling VND1.62 trillion ($69.15 million) to commercial banks on loans taken. The banks restructured the loans twice, but refused to do so a third time after the investor was unable to produce solutions for the plant’s future operations.

Binh Phuoc Ethanol is one of 12 projects named in a 2016 National Assembly list of poor-performing, loss-making projects, that the Ministry of Industry and Trade was tasked with turning around.

Riddled with violations

During its inspection of Binh Phuoc Ethanol, the State Audit agency found numerous shortcomings in the formulation, appraisal and approval of the total investment for the plant.

Particularly, a sum of $36 million for the procurement of equipment and another $1.13 million for temporary equipment was included in the total registered capital without OBF producing supplier quotes or a premise for determining the prices.

Consulting costs, which overran the regulatory norm for such a project by around $2.68 million, were also lacking a basis for price calculation, the agency said.

The total initial investment of the project of VND1.49 trillion ($63.6 million) approved by OBF, exclusive of value-added tax, was also assessed by the agency as not being in compliance with the Construction Ministry’s regulations, but it did not elaborate.

The JV also lost VND1.65 trillion ($70.43 million), after foreign contractor tax, changes in exchange rates, and additional power contracts outside existing EPC (engineering procurement construction) contracts were calculated, the agency said.

Furthermore,  the total cost of items and equipment under the EPC packages overran initial estimates by $532,438, but OBF was unable to provide a valid explanation.

There were also signs of "abnormalities" in the negotiation process with contractors, leading to the risk of a loss of $4.12 million related to setting up a wastewater treatment system at the plant.

Specifically, OBF had signed an EPC package with TTCL&PVE, a contractor which was a joint venture between Thailand-based construction firm TTCL and state-owned PetroVietnam Engineering, for $58.3 million. But during construction, TTCL&PVE proposed that OBF pays it an extra $4.12 million for costs arising during the process. OBF agreed.

In addition, TTCL&PVE had also underestimated their EPC package by $815,000 worth of contractor tax and $724,000 worth of equipment, which OBF approved without requiring further clarification or recalculation of equipment pricing.

And while the plant was being constructed, TTCL&PVE had unilaterally adjusted designs, cut down on equipment and reduced equipment capacity without renegotiating the contract with OBF, the auditing agency found.

TTCL&PVE also failed to complete their EPC package on time. According to the contract, work should have been fully completed in May 7, 2012, but as of December 2018, 79 months behind schedule, it had not happened. y

OBF suffered an estimated loss of $2.92 million because of this delay, but because it had signed an appendix foregoing a penalty clause in the EPC contract, it could not compel the contractor to pay this sum.

Further, the auditors also found that TTCL&PVE had decided to supply 18 devices from a country different from the one specified in the EPC contract, and 24 pieces of equipment from a different manufacturer.

In particular, the imported equipment worth $40 million used by the contractor for the project did not come with manufacturers’ quality certificates, certificates of origin or equipment origin.

Lastly, the State Audit agency found signs of violations in the inspection and quality management of the Dak Nong warehouse package in the EPC contract with TTCL&PVE.

The State Audit agency has asked the Government to direct authorities to look into and clarify these violations. Standing Deputy Prime Minister Truong Hoa Binh, meanwhile, has assigned the Ministry of Public Security to further investigate and verify the findings.