The price of power

Just 100 MW was at stake but it took 17 years to unravel the tangled web that lay beneath a deal to renovate three power plants in Kerala. As the CPI(M) rallies behind Pinarayi Vijayan,SHAJU PHILIP traces a tale of violations,oversight and collusion....

Written by Shaju Philip | Published: February 11, 2009 12:34 am

The origin

It all started with a proposal to renovate three hydroelectric power stations in Kerala’s Idukki district,at Pallivasal (37.5 MW),Sengulam (48 MW) and Panniar (30 MW). Even though the Central Electricity Authority (CEA) told the Kerala State Electricity Board (KSEB) that there was no need for such a project,the KSEB in August 1995,inked an MoU with SNC Lavalin Inc,Canada — which had long had a presence in the state’s power sector — to establish a joint venture for the rehabilitation of the existing facilities. What nobody could have known was that the deal would come under a question mark,right from the conceptualisation stage,through the negotiations,financing and implementation. There were charges of flagrant violation of regulations,spiking of expert opinions and unjustifiable price contracts,apart from other discrepancies.

The deal

At the time of the MoU,Congress leader A K Antony was the chief minister and G Karthikeyan held the power portfolio. 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 to provide technical services on management,engineering,procurement and construction supervision.

That the MoU was not settled as a final deal helped Karthikeyan plead innocence when the scandal broke. In addition,the deal was inked by now-accused KSEB chairman R Sivadasan,apparently without Karthikeyan’s knowledge.

The discrepancies

In May 1996,the CPI(M)-led Left Democratic Front Government assumed office with Pinarayi Vijayan as the power minister. In October 1996,then chief minister E K Nayanar and Vijayan led a delegation to Canada for discussions with Lavalin. In February 1997,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. The amount to be paid to Lavalin was pegged at Rs 149.15 crore. According to the audit report,Vijayan gave scant regard to the fact that Lavalin was only an intermediary and not the equipment manufacturert.

Although all projects above Rs 100 crore require sanction from the CEA,the board outwitted the condition by splitting the project into three parts. In addition,the feasibility study was held only after signing the MoU. Shockingly,the report was prepared by a retired chief engineer who was then working as a consultant for Lavalin. The board also failed to ensure the reasonableness of the prices of goods quoted by Lavalin,before signing the final deal. Eight months after the final contract,the board entrusted the National Hydro-Electric Power Corporation Ltd (NHPC) to conduct a study to justify the prices quoted by Lavalin. But the board did not make available the technical details of the equipment to the NHPC for a price comparison. Later,in view of the grant to the proposed Malabar Cancer Centre (MCC),the NHPC found that the purchase of Canadian equipment and accessories could be considered favourably.

Incidentally,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 till January 1997,though 28 board meetings had been held between 1995 and 1996.

More harm than good

Though the renovations were to be completed by September 2001,they were done only in February 2003,after exhausting Rs 250.40 crore,apart from a 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 it was unusable. 

As a result,power generation at the three sites could not be maintained even at the pre-renovation level. In fact,comparative calculations taking into account rainfall and power generation in the sites showed that the generation graph actually went down after the “renovation”.

Cost & loss

The audit report found grave lapses on the part of the KSEB while fixing the cost of renovation. According to the norms fixed by the Central Board of Irrigation and Power,the 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 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 also showed that 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 an avoidable payment of Rs 20.31 crore. There was no rationale for making payments for intermediary services when the 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 and commitment fees. The audit report said absence of a pre-contract identification of items to be renovated and failure to inspect off-specification goods resulted in losses of Rs 1.78 crore. The report added that supply of equipment with design defects and failure to recover the cost from Lavalin resulted in a loss of Rs 1.92 crore.

Hospital project

When Vijayan led the ministerial delegation to Canada in 1996,Lavalin had agreed to mobilise funds for the construction of a hospital,Malabar Cancer Centre (MCC),in Thalassery in north Kerala. 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,Chennai,a construction firm. The Government did not receive the rest of the grant.

Funds for the MCC was an integral part of the agreement awarding the project. The NHPC justified the exorbitant prices quoted in the supply contract only because of this grant.

The MCC,which was inaugurated in 2001,which was under the KSEB till last year,but sources say it barely functions due to shortage of funds.

Where’s the money?

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. Though Technicaliya had never figured in the Canadian deal,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.

Lid off the scam

What opened the Pandora’s Box were the findings of the state Assembly Subject Committee in 2001 that the deal with Lavalin had led to huge losses for the Government. CPI(M) leader Kodiyeri Balakrishnan,now state Home Minister,had been a member of that panel.

In 2002,the Congress government ordered a Vigilance probe,but it failed to make any headway. But when the CAG report (2005) said the state had lost Rs 374.5 crore in the deal,it changed the course of the scam and the Vigilance probe was revived. Early 2006,the Vigilance submitted its preliminary report in court,arraigning eight people as accused. The Vigilance bid to file the FIR in 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,CM Oommen Chandy announced that the case will be handed over to the CBI,amid allegations that the police had let politicians off the hook.

Current status

After the present Government assumed office in May 2006,the case went to the backburner. The Government made every effort to prevent a CBI probe,when public interest litigations were filed in the High Court. However,the High Court asked the CBI to probe the case in 2007. The CBI filed its final report in the last week of January and named 11 people as accused,charging them under Sections 120B,420,of the IPC and with Sections 13(1) and 13(2) of the Prevention of Corruption Act. The CBI found that Vijayan,the ninth accused,had shown unusual enthusiasm in the deal. Among its charges against him: the final contract with Lavalin was entered into without Cabinet consent; he held direct discussions with a senior manager of the SBI to get exemption of bank guarantee for the amount promised to the MCC; he finalised the contract without the formal approval of the KSEB; and that he had been keen to retain the MCC under the KSEB.

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