SNC Lavalin Case: What are the Facts?

The permission given by the Governor of Kerala R. S. Gavai to prosecute Pinarayi Vijayan, the Kerala State Secretary of the CPI (M), has been criticised widely for its constitutional impropriety and bias. In this context, I am posting here a 2006 article on the issue, written by M. A. Baby, the present Minister for Education and Culture in Kerala:

SNC LAVALIN CONTROVERSY
A High Voltage Slander Campaign

M A Baby

THE SNC Lavalin controversy in Kerala is yet another example of public controversies hatched and fanned up by an anti-Party clique primarily operating within the mass media in collusion with the UDF leaders. The controversy is based on the alleged remarks contained in the confidential draft audit para of Accountant General’s Inspection Report. This so-called report was selectively leaked to the media and a cloud of corruption was sought to be created around CPI(M) leaders, particularly Party state secretary Pinarayi Vijayan who was the electricity minister during 1996-99 period in the last LDF government. A careful examination of the facts will reveal the sinister scheme of the UDF and a section of the media.

THE ORIGINAL AGREEMENT

Pallivasal (1940-41), Sengulam (1954-55) and Panniar (1963-64) are among the first generation hydro electric projects in Kerala. Having outlived their normal age and due to heavy maintenance, the full capacity of these plants could not be utilised. The UDF government decided in 1995 to replace the existing machinery and to upgrade and modernise these power projects. For this purpose they chose the Memorandum of Understanding (MoU) route instead of calling global tenders.

Accordingly, a MoU was signed with SNC Lavalin, a Canadian engineering and consultancy firm, on August 10, 1995 by C V Padmarajan, the then minister for electricity in the UDF government and the present vice-chairman of the State Planning Board. As per this MoU, the Export Development Corporation of Canada “agreed to provide a financing package for the supply of Canadian goods and services” for the upgradation of Pallivasal-Sengulam-Panniar projects (hereafter PSP projects).

Later on, G Karthikeyan, the new minister for electricity in the A K Antony ministry, visited Canada on February 24, 1996 and signed an agreement for provision of services of SNC Lavalin “for Management, Engineering, Procurement and Construction Supervision so as to ensure the timely completion of the project within the agreed time frame of three years…..” Besides, it was also stipulated in the agreement that the annexure documents were also integral part of the contract. Annexure B provided the list of “Canadian financed Goods and Services” and their prices and an estimate of the overall cost to be financed by Canadian export credit.

LDF GOVT’S EFFORTS

By the time the Left Democratic Front (LDF) returned to power in May 1996, the power situation in the state had reached crisis proportions. The state was going through three and half hours of load shedding for domestic consumers and 95 per cent power cut for industries. The Kerala State Electricity Board (KSEB) was also crippled with financial crisis. In such a scenario, the LDF government took measures to complete the ongoing projects on a war footing. It also initiated new projects. As a result, when the term of the LDF government ended in May 2001, the installed capacity of power generation in the state had increased by 1083.6 MW as against the previous UDF government’s achievement of a paltry 14 MW. With load shedding and power cut totally withdrawn by the end of LDF government term, Kerala could claim to be self-sufficient in power.

A key feature of the LDF government’s approach was the insistence on a transparent process of procurement. Not a single project, which was started during LDF period was taken up under the MoU route or contracted to MNCs. Open tenders were called for Athirapally hydro electric project (163 MW) and Kuttiadi Additional Extension (100 MW) scheme which were initiated by LDF government. The Kozhikkode thermal project was also tendered and was executed by BHEL. In contrast, under earlier UDF regime, not a single project was contracted through open tender, including the now controversial PSP projects. Further, most of these projects were also contracted to MNCs.

LIMITED OPTIONS

After the formation of the government, the LDF ministry faced this question: What was to be done with regard to the projects initiated through MoU route by the erstwhile UDF government? Most of the thermal projects which UDF had already signed MoUs and power purchase agreements (PPAs) did not fructify. In the case of the Neryamangalam and Sabari hydel projects, the LDF government decided to ignore the MoUs and go for fresh global tender. In the case of Neryamangalam power project (25 MW) for which UDF had signed a MoU with the Swedish multinational company ABB, the MNC went to court resulting in the project being held up for five years. Finally, the Supreme Court ruled in favour of ABB.

However, in the case of the controversial PSP projects, not only was a MoU signed but also an agreement had already been signed with SNC Lavalin during the UDF regime. As per the terms of the agreement, only International Chamber of Commerce in Paris could arbitrate disputes. Given the advanced stage of negotiations and terms of the signed agreement, the LDF government decided to go ahead with the package that was drawn up by the UDF government.

Accordingly, a ministerial team headed by the chief minister E K Nayanar and electricity minister Pinarayi Vijayan along with KSEB officials visited Canada in October 1996 to hold discussions with SNC Lavalin and the Canadian government agencies.

As a result of these negotiations, the LDF government was successful in:

1. reducing the foreign components of the project from Rs 188 crore to Rs 149 crore
2. reducing the consultancy fee for SNC-Lavalin from Rs 24.4 crore to Rs 17.88 crore
3. lowering the interest rate on the loan from 7.8 per cent to 6.8 per cent and
4. raising the complementary grant component of the package from Rs 43 crore to Rs 98 crore.

The last component – the grant from the Canadian aid agencies – was to be arranged by SNC Lavalin for setting up of a modern cancer hospital in Malabar. Subsequently on July 6, 1998 two addendums to the original agreement were signed for supply of Canadian goods and spare parts on the basis of the fixed prices already indicated in annexure B of the agreement entered in February 1996.

UDF THE REAL VILLIAN

A number of criticisms have come up in the media on the basis of the so-called draft audit paras of AGs report that have been leaked to the media. The main arguments are:

1. The decision for upgradation was made in contravention of the advice given by the Central Electricity Authority (CEA) and was also done without a pre-feasibility study.
2. E Balanandan committee’s recommendation against going in for comprehensive upgradation of the above projects was ignored by the LDF government.
3. According to the New Indian Express the LDF government chose the Canadian MNC, which quoted much higher rate than BHEL, for the contract disregarding the offer from the public sector BHEL.
4. The LDF government converted a mere consultancy agreement entered into by the UDF government into a supply order agreement, without going for a global tender.

The critics ignore the simple basic fact that it was the UDF government which took the decision for upgradation, chose SNC Lavalin as the agency for implementation under the MoU route and entered into an agreement with them. It must be admitted that the choice for upgradation or maintenance or some other option is a techno-economic choice and there can be genuine differences of opinion. The consensus within the KSEB was for upgradation. Whatever be the reason, the choice was made by the UDF.

E Balanandan Committee was appointed by the LDF government to suggest measures to improve the functioning of the KSEB, to recommend short-term steps to manage the power crisis and long-term policy for acceleration of power production. The committee had submitted the report on February 2, 1997, by which time the negotiations with the Canadian agencies for the PSP project had reached an irreversibly advanced stage. It may be noted that most of the other recommendations of the committee were accepted and implemented by the government.

Another brazen lie that is being propagated by the vested interests and even editorialised by the New Indian Express is that the LDF government had ignored the lower quotation offered by BHEL and chose to give the contract to a MNC. As we have seen earlier, the MoU route and the foreign consultant were chosen by the UDF government. The lower offer said to be made by BHEL is only a figment of imagination as has been confirmed by the UDF electricity minister on October 16, 2001 in the state legislature.

The most serious charge made against the LDF is that the UDF government had signed only a mere consultancy agreement with SNC Lavalin while the LDF government chose to sign a supply order with them without going for a global tender. It is a well-known fact that the MoU route with bilateral financial assistance precludes procurement through global tender. Actually the contract entered between KSEB and SNC-Lavalin on February 24, 1996 during the UDF regime was a contract which also included supply of Canadian goods and services in addition to providing Technical Services. There was no further addition to the scope of work during the LDF government’s period. Annexure B of the Contract Agreement dated February 24, 1996 provides evidence for this. In this Annexure it is mentioned as follows. "Meetings and discussions with EDC (Export Development Corporation) of Canada have established preliminary agreement that funding can be made available to finance the supply of Canadian sourced goods and services. The value of proposed financing has been tentatively agreed on the basis of an estimate prepared by SNC-Lavalin". Thus the agreement of February 24, 1996 entered during the UDF regime was a fixed price contract and the subsequent LDF government was faced with a fait accompli from which there was no question of backtracking. All that could have been done was to reduce the cost of goods and services, which the LDF government succeeded in doing.

THE RELATIVE PRICES

The only question that remains is whether the pricing of 59.95 million dollar (Canadian dollars) was excessive or not. The prices were fixed on the basis of rates proposed by a consultant appointed by the UDF government. The minutes of the Kerala State Electricity Board meeting also indicates that the Export Development Corporation, Canada had indeed taken price offers from qualified Canadian companies before the prices were finalised. The UDF government accepted these prices as part of the February 1996 agreement. The subsequent addendum signed during the LDF period was in line with this original agreement.

It may also be mentioned that the Board had to enter into such a financial arrangement in the context of an acute financial crunch as well as the high cost of domestic borrowing due to the wrong policies of the central government. Further, the LDF government had appointed National Hydro Power Corporation, as a consultant to verify the costs. The estimate given by SNC Lavalin was certified as reasonable and comparable to international level prices by the NHPC.

The critics have repeatedly made price comparison with the costs per unit of MW in the Neryamangalam hydel upgradation project. As per the so called AG audit para, this cost was only Rs 1.07 per MW as against SNC Lavalin’s cost of Rs 2.24 MW for the PSP project. Based on this cost comparison, it is alleged that the SNC Lavalin derived undue benefit of Rs 110 crore from this difference alone and that the state exchequer suffered losses to that extent. It may be noted that the comparison is being made between two non-comparable parameters. While in Neriyamangalam project the scope of work included only rewinding of the generators and some other minor replacements, the PSP project required the replacement of the entire machinery and equipment including generators, turbines and the control systems. The cost per MW for the latter would be higher than the former in any case.

UDF ADMISSION OF THE PACKAGE

The former UDF electricity minister G Karthikeyan who had signed the original agreement of February 1996 with SNC Lavalin for PSP projects, while participating in a debate in the Kerala legislative assembly, admitted that the contract was a package and global tenders could not have been invited. In fact, when he became minister midway through the UDF regime, the MoU and "consultancy" agreement had already been signed with SNC Lavalin by the previous electricity minister C V Padmarajan, for the extension of Kuttiadi hydroelectric project. Addendum agreements for supply of goods for the Kuttiadi extension scheme were signed by Karthikeyan on February 24, 1996, the very same day "the consultancy" agreement for PSP projects was also signed. The ex-UDF minister admitted in the assembly that he had no option for going for global tender for the Kuttiadi project.

In fact, the final CAG report for the year 2004 already presented to the assembly contains severe indictment of the UDF record in the implementation of the Kuttiadi extension project. The decision to take up the extension of the Kuttidadi hydroelectric project by setting up new generators at the cost of Rs 201 crore proved totally wasteful as not a single additional unit of energy was generated. The CAG report points out that the so-called excess water that was said to be available for the additional generators installed in the project proved to be a mirage, and the state has suffered a huge loss. The UDF and the media have pushed this scandal under the carpet and have chosen to go hammer and tongs at the PSP projects on the basis of an audit report that is yet to be finalised.

QUALITY OF EQUIPMENTS

There have been criticisms that the equipments supplied by SNC Lavalin were not of high quality and some of them have been faulty. We cannot comment on these criticisms for lack of full knowledge. But what is to be remembered is that the final payments for supply of machinery, made to SNC Lavalin, were released during the tenure of the present UDF government (during 2001-2003). It is the present UDF government which should have ensured that the machinery and the equipments were as per the terms of agreement and fully operational before the final settlement of payment was made.

The criticism that the expenditure on the renovation was rendered wasteful due to non-achievement of pre-renovation generation levels is baseless. The current UDF electricity minister in an answer to a question on the floor of the assembly on July 22, 2005 has stated that, contrary to what is being propagated, the installed capacity of the PSP project was 114 MW and the present installed capacity after renovation is 125 MW. It may also be true that the full capacity of the project was not utilised during the initial period after renovation because of the teething troubles and inevitable gestation period required for new machinery or vagaries of water flows. At any rate, it is for the UDF government to respond to these criticisms on the quality of the equipments.

Another criticism is that the project, which had to be completed by 2001, was completed only in 2003. Some critics have even attempted to calculate the opportunity cost of the energy production forgone and add it to the alleged loss incurred as a result of the Lavalin deal. The present UDF electricity minister had clarified in the assembly on February 10, 2005 about the reasons for the delay in completion of the project thus; “in the case of Pallivasal-Sengulam-Panniar projects also all above mentioned precautions (in order to ensure timely completion of the projects) have been adopted. But since these were renovation projects, there were certain unexpected hurdles while dismantling old machinery and installing the new machinery and also there were delays in procuring certain equipments within India, there occurred a short time over run. Nevertheless all these problems have been overcome and the projects completed.”

MALABAR CANCER CENTER

Finally, we shall take up the controversy regarding the Malabar Cancer Centre, which was to be setup with the grant from Canadian aid agencies. Canada and some of the other developed countries have been using their foreign aid grants as an incentive to procure commercial deals and supply orders for their MNCs. With respect to Kuttiadi project, which was entirely finalised by the UDF government of 1991-96, also there was a grant component, which was to be utilised for strengthening the electricity distribution system in Malabar. Right from the beginning of the negotiation process for the PSP project by the UDF government, the grant component was also a subject of discussion. The grant component proposed was Rs 45 crore i.e equivalent to 30 per cent of the project cost for educational/health/ environmental schemes in the project region. During the ministerial level negotiations in October 1996, the matter regarding the grant was discussed and it was decided that a cancer hospital would be setup in Malabar with Canadian grant.

SNC Lavalin prepared a project proposal for cancer hospital with an outlay of Rs 103 crore. The government of Kerala was to contribute Rs 5 crore towards land and some other related infrastructure development and the remaining Rs 98 crore was to be grant from Canadian aid agencies. Representatives of CIDA and Quebec provincial government had participated in the discussions on Malabar Cancer Centre. The government entered into an MoU with SNC Lavalin by which the latter was to be a consultant to the project and also arrange the necessary grants from Canadian agencies. The MoU was to be converted into an agreement on the basis of further consultations. In short, the discussion regarding the grant was a fully transparent process in continuation of the original UDF agreement with SNC Lavalin and was initiated on the basis of cabinet decision.

The Malabar Cancer Centre has now become a topic of major controversy because the promised Canadian aid has not yet materialised fully. The launch of the hospital project was delayed due to the unexpected fall out of Pokhran nuclear test. Nevertheless, nearly Rs 15 crore of Canadian grant was received and first phase of the construction and establishment of hospital was completed.

This was the stage when UDF came to power. The UDF was not enthusiastic about implementing the hospital project for political reasons and neglected the follow up to the MoU to its logical conclusion. Not only was the MoU not converted into an agreement but the MoU itself was not renewed and was allowed to lapse. The government of Kerala failed to send even a letter of appreciation for completion of the first phase. The SNC Lavalin took the position that establishing the hospital was a joint venture and that the Kerala government also had to actively collaborate with them in lobbying for the Canadian aid. As far late as December 2002 in a letter to chief minister A K Antony they had requested (a) more frequent meetings and consultations (b) signing of the draft agreement (c) a joint communication campaign and (d) speeding up of the civil works. Kerala government did not give a formal response even to this letter. Now it is observed that consequent to the new policy of government of India regarding receipt of foreign aid, Canadian High Commissioner has informed the government of Kerala that Canada can no more provide aid to official agencies. The government of Kerala has failed to even respond by informing that the government of India's new policy is applicable only to new aid programmes and not to the ongoing programmes.

Needless to say all the wild charges of siphoning of hospital funds by the CPI(M) are totally baseless. The Canadian aid can only be routed to agencies agreed up on in the MoU and by following FCRA regulations. The Technicalia Consultants, Chennai has been given the contract for construction of the hospital and the Canadian aid for the expenditure incurred was directly paid to them. As per order No.11/21022/94(506)/2000-FCRA.IV dated April 26, 2001 the Ministry of Home Affairs has regularised the payment of Rs 13 crore made for this purpose. As per this order the Malabar Cancer Centre Society was to maintain separate set of accounts and records exclusively for foreign contribution as per FCRA; maintain only one special account for the purpose and report on the utilisation as per rules. There has been nothing irregular regarding the utilisation of the grant that has so far been received. It may also be noted that Malabar Cancer Centre Society, which was formed as per the decision of the cabinet, has chief minister as the chairman of the governing council and includes state electricity minister.

It appears that the enthusiasm of SNC Lavalin, which had agreed to arrange for the grant, waned after sometime. It is said they were unwilling to take up a commitment for finance under an enforceable contract. The CPI(M) does not hold any brief for the action or non-action of SNC Lavalin. However, the role of the UDF in scuttling the Malabar cancer project has been thoroughly exposed. They failed to effectively pursue the issue because of their narrow-minded political reasons. Our Party had publicly criticised the UDF government’s inaction a number of times. It was in the background of the mounting criticism that even Malayala Manorama had to write an editorial in 2002 criticising the government for politicising the hospital development issue. The failure to ensure the take off of the hospital is a major emotional issue and source of resentment in Malabar, for which the UDF government is to be blamed.

SLANDER BASED ON IMAGINARY LOSSES

The high voltage slander campaign against the LDF seeks to project that CAG has found a loss of Rs 374 crore to the state of Kerala from the Lavalin-PSP projects. It offends commonsense to argue that the project with an outlay of Rs 259 crore has resulted in a loss of Rs 374 crore. This bombastic figure has been reached by including the so-called opportunity cost of the energy forgone due to the delay in commissioning of the project, exaggerated figures of excess payment for machinery arrived on the basis of cost calculations of non-comparable hydel renovation projects and so on. Many of these allegations would not have found place even in the draft audit paragraph of AG, if the KSE Board and the power department had given proper and timely responses to the audit queries.

The UDF has raked up the Lavalin case for explicit political objectives. It had raised criticisms against the project even while in opposition. Soon after their government came to power, a number of UDF MLAs submitted a memorandum to the chief minister A K Antony demanding institution of a vigilance inquiry into the Lavalin deal. The Subject Committee of the Assembly for Irrigation and Power also discussed the issue. After long discussions, the committee – with UDF majority – did not make any recommendation but left it to the chairman to take appropriate action. It took the UDF leadership eight months to order a vigilance inquiry about the deal in March 2003. The decision was clearly politically motivated. The UDF was in the dock in the face of heroic mass struggle following the Muthanga police violence against Adivasis. The so-called vigilance enquiry has dragged on for the next two and a half years. The bogey of vigilance case has been raised once again today as the UDF is politically finding itself cornered and isolated after the rout in the last Lok Sabha elections and later in the two assembly by-elections at Azhikkode and Koothuparamba.

Lavalin issue is the last straw clutched by the drowning UDF campaign managers. Now the government has declared that the vigilance inquiry would be expedited. If genuine inquiry is held, it is the former UDF ministers who are going to be in the dock. Therefore the bogey of speedy inquiry is only a smokescreen to politically malign the CPI(M) and the LDF. The CPI(M) has welcomed any type of inquiry to bring out the truth.

Source: http://pd.cpim.org/2005/0814/08142005_ma%20baby.htm