Managing bids

Published : Sep 21, 2012 00:00 IST

THE CAGs report on ultra-mega power projects (UMPPs) is a severe indictment of the government for the undue benefits given to private players in the sector, which have led to a squandering away of precious natural resources. The report points out the bias in the governments power policy, which rolls out special incentives to corporate conglomerates that invest in the sector, while neglecting the public sector.

The report, based on the results of the performance audit of the Ministry of Power and the Power Finance Corporation Limited, is an assessment of the degree of transparency followed in awarding UMPPs to private developers. The idea of a UMPP was first conceived by the Ministry of Power in 2005. Each UMPP was slated to generate around 4,000 MW. The estimated cost for each project was between Rs.16,000 crore and Rs.20,000 crore.

The Ministry proposed the route of Special Purpose Vehicle (SPV) for the implementation of these projects, whereby an SPV or a legal entity would be created to fulfil the temporary objectives of the companies, such as site identification with the Central Electricity Authority, land acquisition, and coal block allocation. The SPV was to be transferred to the successful bidder after the bidder was identified. The SPVs invited bids for six UMPPs between March 2006 and March 2012 and awarded four UMPPs Sasan in Madhya Pradesh, Mundra in Gujarat, Krishnapatnam in Andhra Pradesh, and Tilaiya in Jharkhand to private players.

The report has raised questions about the lack of transparency in the process of awarding bids and the undue financial benefits given to certain private developers. The audit by the CAG has revealed that though the lowest bidder (ICRA) was declared technically qualified for the UMPPs at Sasan and Mundra, its bid was overlooked and the contract was awarded at a higher price to Ernst & Young on the grounds that it had advised on the bid process management of a power project in Bangladesh. The consultancy work for the Tilaiya project was awarded to Ernst & Young without inviting bids.

A number of other concessions awarded to the private players allowed them to dilute their engagement with the power projects. The setting up of power projects, in this way, was merely translated into an exercise of raising capital from the market instead of contributing significantly to power production and thereby sustainable infrastructure development.

As per the report, the equity lock-in requirement for the selected bidder in a SPV was reduced from 12 years to five years from the date of commercial operation for the UMPPs in Krishnapatnam and Tilaiya. Also, private developers were allowed to dilute their equity holding from 51 per cent to 26 per cent in all the four UMPPs, though the quoted tariff was valid for 25 years.

The minimum net worth of Rs.1,000 crore mentioned in all bidding documents for private developers was only 5 per cent of the total project cost of Rs.20,000 crore, whereas the Ministry of Finance had laid out a minimum net worth requirement of 15 per cent of the project cost for private developers in a PPP project costing Rs.1,000 crore or more.

In an interaction with the media following the release of the report, A.K. Patnaik, Deputy CAG, said that the audit was carried out to ensure fair play, a level playground, and transparency of the bidding process for future developers.

The report has brought to the fore the issue of allocation of surplus coal to Reliance Power Limited (RPL) as a form of post-bid concession given to the private developer. Two coal blocks, at Moher and Moher-Amlohri extension, were allotted in September 2006. A third block, at Chhatrasaal, was allotted to the Sasan UMPP to meet its annual coal requirement of 16 million tonnes. In November 2007, the Chief Minister of Madhya Pradesh requested the Prime Minister to allow RPL to use the surplus coal from the captive blocks of Sasan UMPP in the power plant set up by RPL in Chitrangi tehsil.

The CAG report estimates that this decision is likely to result in a financial benefit of Rs.29,033 crore over 20 years to the project developer. The report states: The permission to use surplus coal in other projects of the developer vitiated the sanctity of the bidding process since it amounts to post-bid concessions having significant financial implication. The usage of surplus coal was not mentioned in the coal block allocation letters and it was, therefore, unfair to the other bidders.

Reliance Power has denied any financial benefit from being permitted to use extra coal in another project on the grounds that information on additional coal in the three blocks was known to all bidders.

Prabir Purkayastha, a power expert and a member of the Delhi Science Forum, said this was indicative of a larger malaise in the power policy. He said: Limited natural resources are being given away in such a way as to benefit speculators instead of encouraging any meaningful long-term investment.

Sagnik Dutta
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