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
- 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
- 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
- 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 - SNC-Lavalin (2009), SNC-Lavalin in Kerala State, Retrieved on December 2010 from http://www.snclavalin.com/news_kerala.php?lang=en
- 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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