The Price Of Power

The latest case to attract controversy is the Zero Unit power project in Neyveli, Tamil Nadu, with parliamentarians and top government officials saying that the project, along with other fast-track power sector "deals", needs serious investigation. The facts of the case are quite startling. A little-known but well-connected non-resident Indian from the US has procured a Rs 1,325-crore power unit in the space of four days. The 210 MW project was sanctioned in March 1989 for Rs 397.26 crore. As happens with power sector projects when strings are not pulled, an inevitable delay ensued.

In this case, the cost of production kept multiplying until a bid came from Sharad Tak, a prosperous NRI till then specialising in such diverse fields as software, communications, broadcasting and real estate in the US. And the result was instantaneous. "As if on cue, all hurdles were cleared without a bother," says CPI(M) MP Dipanker Mukerjee, who is spearheading his party's campaign against the Neyveli 'sellout' on the same scale as the CPI is doing on the Bailadilla issue.

As part of the agitation, the standing committee of Parliament attached to the Ministry of Energy is stoutly opposing the move to allot the project to Sharad Tak Power Systems (STPS) instead of the public sector Neyveli Lignite Corporation (NLC), which apart from a good track record in running power units, was offering to set up the unit at a much lower estimate. It had offered to do so without any budgetary support and had even laid the foundation stone, reasonably confident of getting things moving.

The project was sanctioned in 1989.Neyveli Lignite then sought the permission of the Union Coal Ministry to negotiate with four firms who had in the past supplied some equipment to the NLC. Their rates being high, the Government suggested that BHEL be brought into the picture, but experts suggested that even the BHEL offer was on the 'higher' side. In 1991, after many biddings had been discussed threadbare, though unsuccessfully, and the cost of escalation had gone up by about 110 per cent, came the offer from STPS, an independent power producer (IPP) now allied with an American power company called CMS.

On October 26, 1991, Tak wrote to the then chairman-cum-managing director (CMD) of NLC, R. Gupta, proposing to put up the Zero Unit either totally in the private sector or jointly with the NLC. On October 27, the proposal was considered by the NLC board of directors and a letter was sent to the Union coal secretary. On January 20, 1992, at an inter-ministerial meeting, it was decided to recommend the transfer ofthe Zero Unit to Tak, "subject to further negotiations and completion of the steps outlined by the Department of Power as per their new policy on power projects in the private sector".

On March 10, 1992, a detailed report for the project was sent by Tak to the CMD of NLC. The proposal was examined by the NLC board on March 20 and its final recommendations sent to the Ministry of Coal on May 5. The then CMD's letter makes interesting reading: "Mr Tak visited Neyveli yesterday, and since our board meeting took place today, we had the occasion of discussing the matter in the meeting. The board was of the opinion that since Mr Tak is keen on investing in a power plant based on lignite, we could consider his proposal for one of our approved projects like the Zero Unit, especially in view of Government of India's recent trend of thinking on the industrial front."

In its assessment of fast-track projects, Parliament's standing committee on energy has found it "distressingby the private company is Rs 1,325 crore, i.e. Rs 5.3 crore per megawatt, as against the NLC's original estimated cost of Rs 397 crore, i.e. Rs 1.89 crore per megawatt".

The document points out: "The (standing) committee could hardly believe that the present day cost on turn-key execution in the private sector would rise to the order of Rs 1,325 crore. The committee feels that something is seriously wrong in the cost index allowed by the Cabinet Committee on Economic Affairs (CCEA) for the private sector. The committee would like to be apprised of the details of the justification for the cost index employed by the CCEA while adjusting for complete cost of the private sector projects."

Quite apart from the technical logistics involved, the manner in which the systematic lobbying was conducted has raised eyebrows. Says Congress MP Shiv Charan Mathur: "The entire parliamentary procedure has been subverted to accommodate one man." 

ON October 23, 1991, Mervyn M. Dymally, a member of the United States House of Representatives, shot off a letter to Prime Minister P.V. Narasimha Rao, introducing "a very prominent Indian-born American businessman, Mr Sharad Tak" who was looking "to India for some new investments because of your economic reform". Requesting Rao to give an appointment to Tak, Dymally believed the NRI could make a "significant contribution to the economy". His parting shot for the Indian Prime Minister: "By the way, he is a friend of our mutual friend." Investigators here list Dymally as a close associate of godman Chandraswami.

On November 25, the then American consul general at Madras, Ernestine Heck, wrote a detailed letter to the CMD suggesting that, "on the advice of my commercial officer", Tak's "involvement in these projects could be a mutually beneficial experience". The consul general went out of his way to suggest that he "would appreciate any consideration which you and members of the board of NLC might extend to Mr Tak in his efforts".

The final clincher came from the Neyveli CMD himself when he wrote to the then Union Coal Secretary S.K. Lall on November 27. "Since Shri Tak is keen on getting this matter processed at an early date," he noted, "and since we have some of these projects already approved, the Government may like to accord expeditious clearance for such a proposal so that we could discuss the same with him in further detail."

 Interestingly, Neyveli may not be a stray case. The action taken report (ATR) of the Government presented before Parliament last month voiced some disturbing trends in the allotment of power projects. According to the report, "there appeared to be an onrush of transferring of public sector power projects to the private sector, thereby diluting the objective of the policy. The new policy (of encouraging private sector participation) also has some disquieting features and indicates undue incentives to the private sector which needs a thorough review". It added that "not a single megawatt of capacity has been added by the independent power producers even after a lapse of over three and a half years" since the policy was announced.

The ATR also made some significant observations about other such power projects handed from the public sector to the private sector:

• A confidentiality clause has been inserted in the power purchase agreements for the Dabhol power company leading to an absolute lack of transparency as it precludes public scrutiny. The report points out: "Instead of taking advantage of the international experience in promoter selection, the Government preferred to go in for the bilateral route on the plea that in view of lack of investors' confidence, the negotiated route was the only option."
• The cost per megawatt of all projects in general, and Vishakhapatnam and Dab-hol in particular, appear to be much higher than what BHEL had offered initially. Also the guaranteed rate of return (as in the case of Enron) is encouraging the investors to inflate costs. Lack of competitive bidding has led to a significant padding in investment costs.
• The 600 MW Kameng hydro electric project in Arunachal Pradesh, which had been identified for implementation by the North-Eastern Electric Power Corporation (NEEPCO) as a Central Government project and for which funds had been earmarked to enable investment approval, has been shifted to the private sector. The project is yet to take off. Even the Power Ministry admits that there are merits in continuing the project in the public sector. The ATR quotes the Union power secretary as saying, "We did not pursue the case in the way we ought to have. The MOU between the state government and the private company was signed two years ago, but the project is yet to take off."
• The Karbi Langpi project in Assam which had been partly financed by a leasing company called the OECF, has been transferred to the joint sector even after 50 per cent of the work had been completed at the time. The Central Government's role is not clear. The OECF normally funds only public sector projects. In this case, however, they have been requesting adequate safeguards for the equipment supplied under its loan. Now that the project has been transferred to the joint sector, it may become difficult to fulfill the commitment made to the OECF, creating complications all around.
• Limits on counter-guarantees. The Power Ministry says that counter-guarantees from the Central Government had been envisaged as a transitory measure for state electricity boards (SEBs) in respect of a few initial projects. But what if the SEBs become self-reliant? And what events could preclude the time limit on the counter-guarantee?
• There is no legally enforceable agreement to ensure a committed supply of power.
• Due to lack of competitive bidding, the cost of equipment in the private power sector has been hiked.
• It would be advisable to get public sector companies like BHEL and NTPC to explore the possibility of executing power projects.
• Transmission and distribution of power has been totally neglected. According to the ATR, "this neglect of transmission and distribution will defeat the very purpose of setting up new generation capacity." It has suggested that transmission and mdistribution ought to receive 50 per cent of the total allocation of the power sector. The total allocation of funds under these two are less than 30 per cent so far. As a result, the development of transmission systems has not been commensurate with the growth of installed capacity. It quotes the example of the Farakka barrage in West Bengal which has not been able to operate at an optimum level due to insufficient downstream facilities in the eastern region. Also, while companies have been keen to invest in Maharashtra, all parties are silent on distribution.

The Government has so far not come up with a credible reply to the various charges. But sources in the Finance Ministry indicate that Manmohan Singh has proposed that competitive bidding on all tenders be introduced without delay. It seems that after the telecom and Enron fiascos, the Congress seems ready to learn a lesson.