The audit will look into issues relating to the contract awarding, pricing and appropriateness of various contracts involving the power project.

The Daily Star on January 10 carried a report on the project that contained allegations of serious tender manipulations to favour a certain company.

In its February 18 probe report submitted to the government, KFW said the audit will also cover the financial relationship between the RPC and Palli Bidyut Samities (PBS).

"First preliminary findings indicate that the draft PPA (Power Purchase Agreement) and draft O&M (operation and maintenance) contract for DNPP (Dhaka North Power Project) will have to be modified to comply with internationally accepted standards," it said.

The Daily Star report said the RPC floated the tender a few months ago for Engineering, Procurement and Construction (EPC) contract for the first phase of the 450 mw DNPP and the contract terms bar participation of any EPC contractors.

The first phase will generate 280 mw power at a cost of 150 million euros. The Daily Star reported KFW is providing 40 million euros as 'untied grant' while some 15 Palli Bidyut Samities or rural electricity cooperatives will raise the remaining funds.

A German company -- Lahmeyer-- appointed without any tender, formulated the contract terms. Consequently only two companies initially participated in the bid -- Siemens of Germany and Alsthom of Switzerland.

However, following The Daily Star report, Siemens refrained from submitting its bid. Only Alsthom and a third company -- Kawasaki of Japan -- submitted bids.

Moreover, a host of conditions imposed by Lahmeyer with support from KFW have made the project expensive and the ultimate loser of this deal would be the rural consumers of the project by paying more than the actual prices of power.

As per the German government mandate, KFW cannot impose any condition in a untied grant but it subscribed to the conditions suggested by Lahmeyer.

The Economic Relations Division (ERD) on January 22 wrote to the Power Division of the energy ministry to investigate the reported allegation.

Earlier, the ERD sat with KFW and German government officials and discussed, among other issues, the allegations of corruption.

A three-member KFW mission from Germany investigated the allegations from February 9 to 12.

Probing the allegation that the RPC is strongly influenced by the O&M contractor for the Mymensingh Plant -- Lahmeyer International Palli Power Services Ltd (LIPPS) -- KFW found that a LIPPS representative unethically attended the RPC board meetings.

"Whether this has resulted in contracts, which might be to the disadvantage of RPC or the owner of RPC, will be an issue in the proposed audit," KFW said. "The fact that RPC has relied on the advice and assistance of its operator shows that further strengthening of RPC is highly recommendable."

It suggested the RPC should divest its shares in the LIPPS as soon as possible to increase transparency.

About alleged manipulation of tender terms, KFW notes, "The evaluation of the (two submitted) bids has to show whether technically responsive and financially viable bids have been received."

On hiring the LIPPS directly as consultant, it said, "Such contracts have to be competitively priced and have to include sufficient guarantees and liabilities in order to protect the interests of the shareholders and the customers."

A stricter separation between consultancy services and operational activities has been recommended.