Thursday, December 29, 2011

High Voltage stories from God’s own Country - III

Strange Winds on a Golden Land

“For a short time we lived quietly. But this could not last. White men had found gold in the mountains around the land of winding water.” - A Red Indian Chief

Land was always a problem in India post liberalisation. Since we don’t seem to have a policy similar to Hitler’s Lebensraum (invading neighbouring countries to get more living space) but are more seen to be losing land to enemies, scarcity of land is really a concern. The problem ails power sector too and land allocation has always been a tricky and controversial issue.

Now what will happen if another ingredient comes into the field – gold. Then land becomes more valuable and will invite dubious characters. We need not go further than the history of our Nation itself – the invasions from Arabian Peninsula and Britain were all targeted at the wealth of this Nation. 

This is yet another story of land, gold and greed – a dangerous combination.


The Big Plans

"Suzlon Energy rose nearly 7 per cent to Rs 1,532.70… The traded volumes increased four-fold from the two-week average of 2.2 lakh shares. The stock surged on reports that the company, along with Vestas India, has signed an agreement with the Kerala government for a 15 MW wind power project.” – Business Standard, 28 June 2007

The idea was to install wind turbines in Palakkad district and sell them to potential investors. In Suzlon’s business model in India, turbines and land are sold to clients/investors. Suzlon undertakes only operation and maintenance of the turbines. Accordingly 31 wind turbine generators were installed in Attappady – a tribal area in Palakkad, and also a part of Nilgiris Biosphere Reserve. Investors included Poppy Umbrella Mart, Anna Aluminium, Bhima Jewellery, Kerala Steel Associates and Mumbai’s Asian Star Company.


The Alleged Land Scam

Sarjan Realities is a Pune based associate company of Suzlon which buys land and installs windmills for Suzlon Energy. In the second half of 2010, reports began appearing in media that middle men bought the land from tribals at cheap prices by misleading them and then they sold the land to Sarjan Realities. 

Following the allegations, Attappady’s ITDP (Integrated Tribal Development Project) officer conducted a preliminary inquiry and submitted a report to the district collector on 17 May 2010. This report stated that Suzlon was buying and encroaching upon tribal land. Kerala Restriction on Transfer by and Restoration of Lands to Scheduled Tribes Act, 1999 prohibits such sale of tribal land to non-tribals.

The report also mentioned that more than 60 hectares (ha), where the company has put up 12 windmills, belonged to 36 tribals who were paying tax for the land. In many cases, the tribals were made to believe that they were giving their land on lease. Some of them got Rs. 12,000 for giving land for what they were given to understand as widening of panchayat roads.

A subsequent inquiry by Revenue Divisional Officer (RDO) also revealed forgeries in connivance with officials of the Revenue and Registration department and Attappady Hills Area Development Society (AHADS), an autonomous institution of the Rural Development Department. In many cases, fake documents were prepared to bypass the Kerala Restriction on Transfer by and Restoration of Lands to Scheduled Tribes Act, 1999.


Truth Comes Out

The agitations against Suzlon intensified after the opposition Congress took up the issue. Initially the ruling Communist Party tried to save Government’s face and justify Suzlon. But later, they too changed their stance.

Kerala Government asked the district collector to make a preliminary enquiry and based on that report, the government appointed a high-level committee headed by the Chief Secretary to conduct a probe and prepare a detailed report. The high-level committee in its final report demanded stringent action against Suzlon Energy Ltd and Sarjan Realities Ltd. The committee recommended the dismantling and removal of all the windmills and related accessories from the site. The committee observed that since it was a clear case of trespass, conspiracy, fraud and cheating, the case should be taken to its logical conclusion.

On 10 November 2010, Kerala government ratified the recommendations of the high-level committee and decided to remove Suzlon Energy’s windmills and other establishments from the Attappadi tribal area of Palakkad district. The “evacuation” was to be completed within three months and the land distributed to tribals. The Govt also directed vigilance probe against officials of the revenue department in this regard.


Flip-Flops

Government’s clock has its own pace, which a snail usually manages to challenge and win. Nothing happened against the wind turbines till May 2011 when election results were announced. In the usual Kerala style, people decided to vote Opposition to power, and hence Congress became the ruling party.

While in Opposition, Congress were vociferous in their agitation against the scam and had demanded that the turbines should be dismantled in accordance with the recommendation made by high level committee appointed by the then Govt. But on 24 August 2011, in a major climbdown from its stand during the opposition days, the Congress in Kerala decided not to dismantle the turbines. Instead, the Govt proposed that the wind turbine owners would have to give a share of their profit to the tribals. Strangely, the decision was taken without any discussion with the tribals. The move obviously led to protests from various sections.

On 21 September 2011, Govt tried to correct its mistake and end the land row by putting forward a new proposal. The State Cabinet decided to take over and return to its original owners the 85.21 acres of tribal land in Attappady village of Palakkad district, in possession of Suzlon.  The Govt plans to hand over the operation of windmills to the Kerala State Electricity Board (KSEB) and pass on a share of the profits to the land owners. But it was decided that a final decision on this would be taken only after getting the consent of the land owners and major tribal organisations. 


The Golden Land

The solution adopted by Government seems to be a fair one in the present circumstances. But there are a few questions that are left unanswered.
  • Suzlon is not some small player which can engage in fraud and get away with it. It has a significant long term presence in India. Isn’t it strange that such an organisation will take such a risk in Kerala when there are no similar complaints in the case of its projects in any other states?
  • Was Suzlon and Sarjan Realities duped by middlemen or were they willing accomplices in the scam?
  • The final investors of the wind turbines - Poppy Umbrella Mart, Anna Aluminium, Bhima Jewellery, Kerala Steel Associates and Asian Star Company don’t have anything to do with power sector. Did they have any other motive?

A plausible answer lies in a now forgotten article written by Shahina KK which appeared in Tehelka in 10 July 2010 –

“A Geological Survey of India study of 2005 revealed that Attappady has rich gold deposits. The natives suspect this sudden love for wind energy might be an early sign of a gold rush. Judging by the number of jewellers who have acquired land in the region, there may be some truth in this. Bhima Jewellery owns two windmills built by Suzlon… Asian Star Company, which is in the jewellery and diamond business, also bought three Suzlon windmills.”

Even though this is a serious allegation, no enquiry seems to have been conducted in this aspect. Strangely, the media is also silent on the issue now. Forget the gold, media does not even care to enquire about the investors of the project and their intentions. So for now, only Suzlon and Sarjan Realities are in the dock. So what was the scam all about? Was it just a land scam or was it a precursor to a Gold Rush? Only time will tell…


References
 
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Tuesday, September 13, 2011

High Voltage stories from God’s own Country - II

Power Sector Fraud for Dummies

Here’s a HOW-TO guide on conducting a fraud in Indian power sector based on an actual story. The people who committed the same are still at large and do not share the fate of our former telecom minister. That means the process is still a good option and worth trying. 

To commit this fraud, you either need to be the Power Minister of some state or a consultant. In any case, both need to coordinate their actions and there is no room for individual heroics here. Only a Minister can handle the accusations, allegations and possible legal complications. Only a Consultant will be able to twist the technical and economic details to make the project look innocent. This story is regarding a project done by SNC-Lavalin (a leading Consultancy firm in Canada) in Kerala for three hydroelectric projects owned by Kerala State Electricity Board (KSEB).


Step 1: Forget CEA, Just choose a convenient project

The Hydro Electric Power Stations of the Board at Pallivasal (37.5 MW), Sengulam (48 MW) and Panniar (30 MW) were installed during the period 1940-64.  In 1992 when Kerala was ruled by CPI(M),  KSEB decided to go for a full renovation of all these power stations on the ground that the generators in the Power Stations had outlived their life. Initially they sought approval from the Central Electricity Authority (CEA) for the renovation of Pallivasal project. CEA recommended (in 1992) that immediate replacement of the generating units of Pallivasal Power Station was not necessary, since the plant was in fairly good condition and suggested a new scheme of 60 MW as an augmentation of the existing scheme. Panniar Augmentation scheme and Sengulam Augmentation Schemes for additional power generation was also under the consideration of the Board at the same time. All the above augmentation schemes necessitated uprating of capacity of generators rather than renovation.


Step 2: Forget feasibility study and tenders, Just give the project to a ‘convenient’ Consultant

By 1995, Government changed in Kerala and was then under Congress rule. The projects which were earlier shelved due to opposition from CEA again came back into life. SNC-Lavalin was chosen as the consultant for the project without any global tender. In August 1995, an MoU was signed between KSEB and SNC Lavalin “for establishing a joint venture association for carrying out rehabilitation of existing facilities, identifying the three Hydro Electric Projects at Pallivasal, Sengulam and Panniar for the first batch of renovation. As per the MOU, finance for the renovation was to be arranged by SNC Lavalin from Export Development Corporation (EDC), Canada and Canadian International Development Agency (CIDA).”

It was only after signing the MoU that the board decided to go for a feasibility study. The Board undertook a feasibility study on the proposal only in September 1995, by a retired Chief Engineer of the KSEB. And most importantly, the same person later became a consultant to SNC Lavalin. Based on the consultant’s report and further discussions, contracts were signed in February 1996 with SNC Lavalin for providing technical services for management, EPC supervision to ensure completion of the projects within three years. The agreement was just for consultancy and does not include the purchase of machineries and the total amount to be paid to SNC Lavalin was just Rs. 24 crores.


Step 3: Forget OEMs, Confuse the Common Man

In May 1996, Kerala again turned left and came under CPI(M) rule. This is where the villain (or hero depending on your intentions) of the story comes in. The Power portfolio goes to Pinarayi Vijayan of CPI(M). He goes for a long trip to Canada, from Oct 12, 1996 to Oct 23, 1996. Just after the tour, the Government started to contemplate about giving the purchase orders for equipment also to SNC Lavalin even when they are not the Original Equipment Manufacturers (OEMs) and there were no restrictions in directly procuring the equipment from OEMs. The proposed new contract will cost more than Rs. 300 crore which was a steep price. But to avoid opposition and allegations, an innovative proposal (in the whole history of Indian power sector) was mooted – “In return for the project, SNC-Lavalin and Canadian Government will provide grants to the tune of Rs. 100 crore to set up a Cancer hospital in Kerala.” No one, even the newspapers at the time didn’t care to ask what the relation is between a Power project and a hospital! 


Step 4: Supress Opposition, Get the Proposal Stamped

It is surprising to note that the biggest opposition to the project came not from the opposition parties but from within the party. On September 1996, Govt of Kerala has constituted a committee under comrade E Balanandan to find ways to improve the electricity scenario in Kerala. On 02 February 1997, the committee presented its report which opposed the SNC Lavalin deal. It supported CEA’s viewpoint that efforts should be on uprating of generators, not renovation. It also wondered why Kerala has to purchase equipment through SNC Lavalin when they can directly buy the same from the OEMs – Alstom and Hitachi. Ignoring the findings of committee and suggestions of CEA, KSEB went forward with the deal and on 10 February 1997 they signed a new MoU with SNC Lavalin changing the consultancy contract to a fixed price contract. The price for equipment quoted by SNC Lavalin was accepted without any negotiations. 

To get support for the deal, Pinarayi Vijayan took one more trip to Canada, this time taking the Chief Minister E K Nayanar along with him. What happened next was best illustrated in the CAG report – “The final contract for supply of equipment and engineering services was finalized by the Ministerial delegation directly with the consultant who was acting as an intermediary and was not the manufacturer. The supply of goods and services were actually made by other firms at much higher cost leading to extra avoidable payments. Eight months after signing of the contracts, the Board sought post facto justification of the contract price through the entrustment of a study to National Hydro Electric Power Corporation Limited (NHPC).  It was seen from NHPC’s report that the technical specifications of the equipment required for price comparison purposes were not made available to them.  It was also seen that NHPC had not certified the reasonableness of the prices but had only stated that keeping in view of the soft loan with grant element, the purchase for Canadian equipment and accessories could be considered favourably.  As the grant was not received there was hardly any justification as per NHPC’s report. 


Step 5: Tell a Lie a Hundred times, Some may Believe it at the End

According to the draft agreement for the project, the grant of Rs. 100 crore for setting up a cancer hospital was not a mandatory one. But Govt. kept on justifying the high cost of deal by pointing to the grant. When this was communicated in written by the KSEB Secretary to Power Secretary, GoK in January 1998, the Power Minister Pinarayi Vijayan made the now notorious file noting – “KSEB Secretary’s head should be examined.”! On July 6, 1998 the final agreement was signed with SNC Lavalin. The actual grant given to Cancer hospital was Rs. 10 crores. The rest didn’t materialise. SNC Lavalin got the full payment of over Rs. 300 crore for the project from Govt. of Kerala.

As if all this were not enough, here comes the icing on the cake. After spending over Rs. 300 crore on renovation, the actual production in all the three plants didn’t increase but actually DECREASE which means all the investment has gone wasted. And there were no penalty clauses in the agreement thereby closing the option of legal recourse against SNC Lavalin. 


Step 6: Use Political Might

The Comptroller and Auditor General’s report on 2005 came down heavily against the deal. Here are the conclusions – 

  • There were deviations from prescribed procedures in selection of these projects for renovation and in the award of contract to SNC Lavalin; 
  • Absence of due professional care in negotiating the foreign loan proved to be detrimental to the financial interests of the Board; 
  • The expenditure of Rs.374.50 crore incurred for renovation did not yield commensurate gains;
  • The equipment supplied by the SNC had various defects and certain equipment received could not be utilised; and
  • The very objective of improvement in efficiency of machines could not be achieved as there was no improvement in the generation of power.

On 16 January 2007, Kerala High Court ordered a CBI enquiry into the scandal. On 21 January 2009, the CBI filed a progress report on the investigation in the Kerala High Court. Pinarayi Vijayan had been named as the 9th accused in the case. The CBI stated that Vijayan along with the other accused had, 'fraudulently with dishonest intention' of showing undue favour to SNC Lavalin, entered into only a 'non-binding' memorandum of understanding for Malabar Cancer Center instead of a legally valid memorandum of agreement which facilitated SNC-Lavalin to back out from the commitment later, thereby 'cheating the government'. CBI requested for permission from Governor of the State for prosecuting Vijayan in 2009. Governor asked the opinion of the State Government on the matter. But the state Government was again in the hands of CPI(M) and Vijayan is now the CPI(M) State Secretary and a Politburo member. The Cabinet turned down the proposal for prosecution.

On 06 June 2009, the Governor turned down the cabinet proposal and gave the CBI permission to start the prosecution of Pinarayi Vijayan. Unsurprisingly, the Government appealed against this decision of Governor in Supreme Court. On 31 March 2011, the Supreme Court turned down the appeal. But the wheels of justice are still running very slow and the prosecution may take years to complete.


Conclusion

Now that you know how it is done it is all a matter of just how you adapt the lessons from this story to suit the circumstances. But if things didn’t end up well, you may find yourself in the same prison as that of a former union telecom minister or hopefully a state power minister. (And there is one more former Power Minister of Kerala now in prison for corruption. But then that is another long story.) The author only hopes that whatever financial gains anyone makes with the knowledge and inspiration from this article, a small royalty from those gains are paid to him.


References
  1. Comptroller and Auditor General of India (2005), Overview, Retrieved on December 2010 from http://saiindia.gov.in/cag/sites/default/files/cag_reports/kerala/rep_2005/com_overview.pdf
  2. Comptroller and Auditor General of India (2005), Transaction Audit Observations, Retrieved on December 2010 from www.cag.gov.in/html/cag_reports/kerala/rep_2004/comm_chap3.pdf
  3. Comptroller and Auditor General of India (2005), Review Relating to Statutory Corporation, Retrieved on December 2010 from http://saiindia.gov.in/cag/sites/default/
    files/cag_reports/kerala/rep_2005/com_chapter_3.pdf
  4. SNC-Lavalin (2009), SNC-Lavalin in Kerala State, Retrieved on December 2010 from http://www.snclavalin.com/news_kerala.php?lang=en
  5. SNC Monitor (2009), SNC Lavalin Scandal – The Broad Picture, Retrieved on December 2010 from http://snclavalin.blogspot.com/2009/01/introduction-to-snc-lavalin-scandal.html
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High Voltage stories from God’s own Country - I

One Step Forward, Two Steps Backwards

Note: This is the first part of the series of articles I will be writing about the power sector in Kerala. The high literacy level, high level of electrification and the dubious distinction of being the one of the last states which are resisting SEB unbundling – all these factors offer interesting perspectives which we will be discussing in these articles. Some of the matters being discussed in these article are sub judice and some of them are of political nature and hence the author has tried his best to maintain neutrality.


Introduction

“Ministry of defence: The ministry that defends India against its greatest enemy: not Pakistan, not China, but corruption. No decision, no corruption.” – From ‘A dictionary of our times’ by Pratabh Bhanu Mehta, Indian Express on 27 January 2011

The defence ministry is well known for its strictness and swiftness in acting against corruption ever since the Bofors scandal. But the strict procedures ensure that tenders and procurement processes get postponed/cancelled sometimes even due to vague allegations thereby delaying the modernisation of armed forces. According to rules, if it is found that bribe was paid in a defence deal, howsoever insignificant the amount of bribe is, the deal will have to be cancelled. In an ethical and legal viewpoint, this rule is valid and necessary. But from the perspective of National security, if it is found that bribes haven’t influenced the technical qualifications shouldn’t we have punished the official who accepted the bribe and gone forward with the deal? Each delay in defence projects are exposing more and more of our Nation to future vulnerabilities. For example, in 2009 the Defence Ministry cancelled a 155mm artillery gun tender after Bofors emerged as the frontrunner, since it was embroiled in a corruption case in the 1980s. If being involved in an old corruption scandal acts against winning a new bid, why did the Govt. initially allowed Bofors to participate in the process, thereby delaying the process by months.

But then we are here to discuss about power sector, not defence. When it comes to power sector, even though figures involved are large, the processes are more transparent than the defence ministry. In power sector, high level corruption allegations are not as rampant as that in Defence (ofcourse there are exceptions like Enron) and mostly such issues doesn’t threaten the overall project executions. Eventhough there still exists room in the rules and regulations for manipulations and corruption, the process is transparent and easily verifiable. In those circumstances, won’t it be strange if an Electricity Minister cancels a contract because the leader of opposition made some charges against the contract!!


The Contract

The Government of India had in 2008 announced the Restructured Accelerated Power Development and Reforms Programme (RAPDRP) for strengthening the distribution of State Power utilities and bringing down the Aggregate Technical and Commercial (AT&C) losses to 15% by the end of the project period. On July 2010 the first phase (worth Rs.240 Crores) of the program was awarded to Korea Electric Power Data Company - KEPCO Data Network (KDN), which is claimed to be a global leader in smart grid and is owned by the South Korean government. The major projects proposed for implementation are as follows

  • Establishment of Wide Area Network for KSEB – For connecting all the major offices
  • Establishment of Data Centre – For hosting all the Server systems of Software Applications
  • Energy Auditing
  • GIS based consumer indexing and asset mapping
  • Centralised customer care and web services

In addition, SCADA/DMS project is also included in RAPDRP for which three towns have been qualified as per PFC guidelines. The scheme was unique because the State would not have to repay the loan provided by Central Government through Power Finance Corporation (PFC) if it was successfully implemented within three years, failing which it would have to repay the amount along with the interest. The State would also be eligible for Rs.1000 crore in the second phase of the project, of which 50 per cent would be Central aid. Accordingly KDN was expected to finish the work in November 2011. 


The Allegations

On October 2010, Leader of the Opposition alleged that KSEB gave the project to KDN even when another company – Omni Agate Systems quoted a price which was lower by Rs. 51 crore. He also said that manipulation of tender specifications at the onset had prompted most bidders to back out. The Korean company KEPCO Data Network (KDN)'s bank guarantee, a crucial mechanism to protect the KSEB's financial interest, was drawn in favour of a non-existent entity and instead of disqualifying the company, the KSEB permitted it to change the bank guarantee. A former Electricity minister alleged that the use of free software was mandated to keep Indian IT majors like Infosys and Wipro out of the race.


The Clarifications

In response to the allegations, KSEB came out with three press releases in September 2010, October 2010 and in December 2010 the salient points of which are listed below.

  1. Tender process and evaluation was done under the guidelines and supervision of PFC which is a central sector utility. So there is no scope for state Government to go against the rules.
  2. In most states only 2-3 companies participated in bids for Phase 1 of APDRP while in the case of Kerala about 8 companies participated which disproves the theory of tender conditions being restricted and biased.
  3. KDN has submitted Bank Guarantee DD in favour of Chief Manager instead of Chief Engineer. The mistake happened because in most utilities, DD needs to be drawn in favour of Chief Manager and KSEB is one of the rare exceptions. This was pointed out to KDN and they promptly corrected it. Such corrections are allowed as per the existing rules.
  4. Even though Omni Agate Systems may have quoted a lower bid than KDN, they got only 33 points in technical evaluation while the qualification requirement was 35 and subsequently they were eliminated from the process without even opening their financial bid as per the conditions and rules stipulated by PFC. The software used for doing technical evaluation was also approved by PFC. Omni Agate Systems was also disqualified in technical evaluation of J&K Government for their RAPDRP projects.
  5. There was a Company – MIC which quoted a lower bid than KDN and passed the technical evaluation. But they have failed to include some items in the bid and when KSEB recalculated the bid adding those items too, their total bid amount became more than that quoted by KDN.
  6. Use of free software was mentioned as preferred but was not a mandatory condition.


Let us Retreat!!

Eventhough KSEB put up a brave front, the Government developed cold feet by the fear of the deal being equated with SNC-Lavalin scam (one of the biggest scams in Indian power sector which I will be covering in a later issue). The problem was aggravated by the fact that state elections are scheduled to be conducted on 2011 May.

The Kerala cabinet on 15 December 2010 decided to cancel the contract between KSEB and KDN and retender the work at the insistence of Chief Minister. But the Government couldn’t give any proof on any irregularity committed by either KDN or KSEB. The actual reason was that the Government feared that people may equate this deal with the previous SNC-Lavalin scam which also happened in the previous Government of the same political dispensation. Kerala’s Electricity Minister didn’t try to hide the fact and accepted it publicly -

“Soon, the opposition leader came up with a statement equating it with the SNC-Lavalin. Then came a letter from our own chief minister which left us with no option but to go for a re-tender,” he said. “Those who oppose these projects are giving great disservice to our state.”


Impact

KDN approached Kerala High Court against the decision of state Government. On 4 January 2011 the High Court granted a stay for two months on the state government’s directive on annulling the contract with KDN. 

Now even if the Government goes for retendering after the expiry of stay order, there are only slim chances of the project meeting the deadline of November 2011. This means that the Government will lose Rs.214 crore grant and will also have to pay interest at the rate of 11%. Thus the total financial loss will be Rs.237 crore. There may be further expenses if court accepts KDN’s demand for financial compensation. 

The delay in first phase implementation will also lead to the stalling of the second-phase assistance of RAPRDP, which is to the tune of Rs.5 billion. Thus KSEB will continue with the present AT&C losses thereby further increasing the potential losses.


Looking into the Future

It was not just a project that was blocked; the developmental aspirations and initiatives of a state were blocked. It is natural for people to cry foul after every major deal is signed. It is also in the interest of the Nation that such allegations of foul play be investigated to find if there is any truth in the allegations. But when the policy of court is to not let even a single innocent person get punished even if that means leaving a thousand guilty men free, won’t the policy apply equally in the case of such projects which were time consuming and capital intensive? Just like a person is not pronounced guilty till the Judge delivers the verdict, shouldn’t a project be also viewed as legally valid till a court declares it to be invalid or illegal? Sectors like Defence and Electricity are vital to the strategic interests of the Nation. It is true that we shouldn’t allow corruption in these sectors. But shouldn’t the corruption charges be fought with brain instead of heart and shouldn’t the rulers keep in mind of the next generation instead of next election while taking decisions?  
 


References 
  • http://www.kseb.in/general/rapdrp-projects-in-kseb.html 
  • http://www.kseb.in/news/government-scraps-kseb-rapdrp-tender.html 
  • http://www.thehindu.com/2010/10/09/stories/2010100960360400.htm 
  • http://expressbuzz.com/cities/thiruvananthapuram/deal-with-korean-firm-scrapped-due-to-pressure/236452.html

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