SNC Lavalin case: The scam and the probe so far

The multi-crore SNC Lavalin scam will continue to rock Kerala for a long time. Here's a minute look at the various aspects of the scam and the probe so far:

Written by Shaju Philip | Thiruvananthapuram | Published: February 10, 2009 3:47 pm

Though ministers in the state’s Left Front Government are going hammer and tongs against the CBI to defend their tainted state secretary Pinarayi Vijayan,the multi-crore SNC Lavalin scam will continue to rock the state for a long time. A minute look at the various aspects of the scam and the probe so far:

Origin of the scandal:

The SNC Lavalin scam pertains to the renovation of hydro electric power stations at Pallivasal (37.5 mw),Sengulam (48 mw) and Panniar (30 mw) — all installed in Idukki district between 1940 and 1964. A look at the conceptualisation,negotiations,financing,implementation,and post-renovation efficiency of the three power projects shows that the corruption pertaining to the deal is unique due to various reasons. Murky deals,flagrant violation of regulations,spiking of expert opinions,unjustifiable price contracts,and several other discrepancies were not mere occasional aberrations but integral part of the renovation work,right from scratch.

The beginning of the scandal can be traced back to 1992 when the Central Electricity Authority (CEA) rejected a Kerala State Electricity Board (KSEB) proposal to renovate the three power projects. The CEA then recommended capacity upgradation of the generators in the three projects,instead of renovation,and found the projects in good health. Disregarding the recommendations of the CEA,the KSEB,in August 1995,inked an MoU with SNC Lavalin Inc,Canada,for establishing a joint venture for the rehabilitation of the existing facilities at Pallivasal,Sengulam,Panniar. Lavalin had been present in the state’s power sector for several decades.

The deal:

At that time,Congress leader A K Antony was the chief minister and G Karthikeyan was his power minister. According to the MoU,the finance for the renovation was to be arranged by Lavalin from the Export Development Corporation (EDC) and Canadian International Development Agency (CIDA). In February 1996,the MoU was converted into a consultancy contract for providing technical services regarding management,engineering,procurement,and construction supervision in order to ensure completion of the projects within three years. The consultancy deal had a clause to nullify the very deal itself,if the conditions were not agreeable to the parties involved.

That the MoU was not settled as a final deal helped Karthikeyan save his skin later. Also,Karthikeyan escaped the hands of law as the deal was inked by KSEB chairman R Sivadasan,without the knowledge of the former. Hence,Sivadasan is the second accused in the CBI case.

The discrepancies:

In May 1996,the CPI(M)-led Left Democratic Front Government assumed office with Pinarayi Vijayan,then a party secretariat member,as the power minister. In October 1996,the then chief minister E K Nayanar and Pinarayi Vijayan led a delegation to Canada for discussions with Lavalin. In February 1997,Pinarayi Vijayan again went to Canada and converted the consultancy agreement into a fixed price deal for supply of equipment and engineering services for the renovation of the projects at a cost of Rs 239.81 crore,85 per cent of which was to be funded by the EDC and the rest by the KSEB. With the reduction in the scope of supply of renovation and consultancy charges,the amount to be paid to Lavalin was pegged at Rs 149.15 crore,including consultancy charges of Rs 17.89 crore.

As per the audit review committee on public sector enterprises,published in 2005,the total expenditure on renovation amounting to Rs 374.50 crore did not yield commensurate gains.

Sadly,the board did not go for a feasibility study,justifying the necessity for undertaking the renovation. The proposals for renovation were not submitted for the concurrence of the CEA. As all projects above Rs 100 crore required sanction from the CEA,the board outwitted the condition by splitting the project into three parts. The feasibility study was held only after signing the MoU. Shockingly,the feasibility report was prepared by a retired chief engineer who was then working as a consultant for Lavalin.

The discrepancy cropped up yet again when the board failed to ensure the reasonableness of the prices of goods quoted by Lavalin in 1997,before signing the final deal.

Eight months after the final contract,the board entrusted the National Hydro Electric Power Corporation Limited (NHEPCL) a study to justify the prices quoted by Lavalin. But the board did not make available the technical details of the equipment to the NHEPCL for a price comparison. The NHEPCL found that in view of the grant to the proposed Malabar Cancer Centre (MCC),the purchase of Canadian equipment and accessories could be considered favourably. But that deal justifying the grant did not reach the MCC.

According to the KSEB (Meetings Regulations) Act 1957,full board meetings should be held once-a-month and urgent issues transacted in between two sessions should be ratified in the immediate succeeding meeting. Surprisingly,the full board was not aware of the necessity for renovation,the signing of the MoU,or the contract for consultancy till January 1997,though 28 board meetings had been held between 1995 and 1996. The final contract for design,supply,and installation of equipment was entered into in February 1997,but was approved by the board only in January 1998.

According to the audit report,Pinarayi Vijayan,who went to Canada in October 1996 for discussions with Lavalin and funding from the CIDA and EDC,gave scant regard to the fact that Lavalin was only an intermediary and not the original equipment manufacturer. It was Alstom,Canada,that provided the equipments. The final contracts were signed in February 1997 with undue haste,without ascertaining the rationale of the prices quoted by Lavalin,said the report.

No technology transfer and defects:

Though the renovations were to be completed by September 2001,due to mismanagement and delay in pre-commissioning stages,the works were over only in February 2003,after exhausting Rs 250.40 crore,apart from the financing liability of Rs 69.83 crore. There was a failure on the part of the KSEB in getting technology transfer and training of personnel as envisaged in the contract with Lavalin. The equipment supplied by Lavalin turned out to be defective,and some of them could not be used at all.

Lavalin did not provide training for the KSEB engineers as per the contract,though training was inevitable for the operation and maintenance of the equipment provided by the company.

The crisis due to the absence of technology transfer and training programmes was worsened by the non-disclosure of technical specifications by Lavalin. As a result,the board engineers failed to identify and rectify defects in the machinery installed by Lavalin. At the stage of erection,the lack of sufficient knowledge led to serious problems at the project sites,mismatch between various pieces of machinery,apart from financial loss.

Due to technical defects in the equipment sourced by Lavalin,power generation at the three projects could not be maintained even at the pre-renovation level. During the pre-renovation period,the total rainfall at the project areas ranged between 3499 mm and 4277 mm,while the total power generated from the three stations hovered between 462.55 and 555.17 million units. During the post-renovation period,the rainfall ranged between 4069 mm and 5607 mm and power generation was between 396.67 and 533.56 million units. This shows that generation graph went south after the renovation and the KSEB failed to achieve the main objective of the multi-crore work.

Cost & loss:

The audit report found grave lapses on the part of the KSEB while fixing the cost of renovation. As per the norms fixed by the Central Board of Irrigation and Power,the cost of capacity benefit in the case of renovation and modernisation of units of hydro power stations should be 25 to 30 per cent,as compared to the cost of installing a new generating unit. The total cost of the Kuttiady additional extension scheme,a new power project with 100 mw capacity,was awarded to the BHEL /L&T on a turnkey basis at Rs 66.05 crore — the per mw cost being Rs 66 lakh.

As per the norms,per mw cost of the three Lavalin projects should not have exceeded Rs 50 lakh. Based on the total cost of Rs 374.50 crore incurred for the project as in December 2004,the per mw cost worked out to Rs 3.24 crore,indicating a total excess cost of Rs 316.75 crore.

The audit report had found huge wastage of public money on various accounts in the works. The failure of the board to exclude the overlapping fee for technical services from the final fixed price contracts for the renovation of the projects resulted in avoidable payment of Rs 20.31 crore. There was no rationale for making payments for intermediary services when consultancy contract was converted into supply contracts. The report said Lavalin no longer performed the role of a technical and financial intermediary. Besides,Rs 16.59 crore was frittered away towards avoidable payments,mainly in the form of exposure fee and commitment fee. The audit report said absence of pre-contract identification of items to be renovated and failure to inspect off-specification goods resulted in avoidable loss of Rs 1.78 crore.

Lavalin suppressed some of the defects of the supplied equipment. The Government was not in a position to recover the cost incurred in this account from Lavalin. The report said supply of equipment with design defects and failure to recover the cost from Lavalin resulted in loss of Rs 1.92 crore.

When Lavalin completed the renovation of the three projects,the total cost had touched Rs 374.5 crore.

Hospital project:

When Pinarayi Vijayan led the ministerial delegation to Canada in 1996,Lavalin had agreed to mobilise funds for the construction of a hospital,Malabar Cancer Centre,at Thalassery,in north Kerala. As per the project cost prepared by Lavalin,the MCC was to cost Rs 103.30 crore,of which Rs 98.30 crore was to be mobilised by Lavalin and the rest by the state Government. But the actual contribution made up to February 2001 was only 8.98 crore by direct payment to Technicaliya Consultants Private Limited,Chennai,a construction firm. The Government did not receive the rest of the grant.

Fund for the MCC was an integral part of the agreement awarding the project. The NHEPCL justified the exorbitant prices quoted in the supply contract only because of the grant to the MCC. Both Lavalin and KSEB had stated in December 1997 that the MCC was directly connected with the renovation project and grant would be available on satisfactory conclusion of the loan agreement.

The MCC,which was inaugurated in 2001,was under the KSEB till last year. Against the backdrop of the move to divide the KSEB into companies,the Government handed over the hospital to the Health Department.

Poor financial resources and lack of doctors affected the functioning of the hospital. According to hospital sources,not a single surgery had been held here in the last six months. Last week,the Centre turned down the plea for funds to complete the infrastructure. The state Government has asked all local bodies in north Kerala to make contributions for the hospital.

Where has the money gone?

According to sources,direct payment to Technicaliya was illegal. Though the MCC had opened an account with the Thalassery branch of the SBI for collecting the grant,it remained almost empty with the minimum balance of Rs 300. Technicaliya had never figured in the Canadian deal,still money went directly into its account,bypassing the government treasury. During the previous Congress government,the Canadian Government had informed that the companies in that country had paid the entire money to the MCC,as per the agreement. It remains a mystery where the rest of the amount has gone. The CPI(M) has not provided any explanation about the missing fund. Lavalin vice-president (public relations) Gillian MacCormack did not respond to the email queries from this newspaper.

Pinarayi was warned against the deal:

CPI(M) veteran E Balanandan,who died last month,had warned the KSEB and its minister Pinarayi Vijayan against the deal with Lavalin when the board wanted to go for the final deal in 1997. An expert committee,headed by Balanandan,had found that the rates fixed by Lavalin for renovation exorbitant and that the same job could be handed over to the public sector BHEL at an affordable rate. He had said that the total replacement of the machinery at the power stations was not necessary and only partial repair and upgradation was required. Party circles believe that Pinarayi Vijayan,then only a state-level leader,must have had the backing of senior leaders to reject the report prepared by Balanandan,then a politburo member. Pinarayi Vijayan’s snubbing of the politburo member had never been discussed within the party. He had also pooh-poohed the condition of the Centre that the board should enter into a deal only with the original manufacturers of machinery.

Investigating the case:

What opened the Pandora’s Box were the findings of the state Assembly Subject Committee in 2001 that the deal with Lavalin had incurred huge loss for the Government. CPI (M) leader Kodiyeri Balakrishnan,now Politburo member and state Home Minister,had been a member of that panel. Kodiyeri had not even raised any objection to the finding of the committee.

In 2002,the Congress government had ordered vigilance probe that failed to make any headway for want of evidence. The CAG report (2005) said the state had lost Rs 374.5 crore in the deal. This changed the course of the scam and the vigilance probe was revived. Early 2006,the vigilance submitted its preliminary report in the court,arraigning eight people as accused. The Vigilance bid to file the FIR in the court,without informing the government,kicked up a controversy. Only KSEB officials were in the list of the accused. Towards the end of the Congress rule,chief minister Oommen Chandy announced that the case will be handed over to the CBI,amid allegations that the police had found fault only with the bureaucrats and let free the politicians.

Recently,the then Vigilance director and retired DGP Upendra Varma said the Vigilance had not exonerated Pinarayi Vijayan,as claimed by certain quarters. The state Vigilance had done only a preliminary investigation and it was open to naming more persons,he said.

Current status:

After the present Government assumed office in May 2006,the case went into back burner. The Government made every effort to prevent a CBI probe,when public interest litigations filed in the High Court. As if Government pleaders were not enough,the party got senior Supreme Court advocates to argue the case against the demand for a CBI probe. However,the High Court asked the CBI to probe the case in 2007. Though the CBI took up the probe,one of the complainants,T P Nandakumar,had to move the court seven times to keep the investigation on right track.

The CBI filed its final report in the last week of January and named 11 people as accused,charging them with sections 120B,420,of the IPC and with sections 13(1) and 13(2) of the Prevention of Corruption Act.

The CBI found that Pinarayi Vijayan,the ninth accused,had shown unusual enthusiasm in the Lavalin deal. The final contract with Lavalin was entered into without the consent of the Cabinet. He had held direct discussions with a senior manager of the SBI to get exemption for the bank guarantee for the amount promised to the MCC. He also finalised the contract without the formal approval from the KSEB. The CBI report said he had been very keen to retain the hospital under the KSEB,though the board had nothing to do with health.

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