IMAGINED CORRUPTION: FACTS IN THE SNC-LAVALIN CONTROVERSY

M. A. Baby

The permission accorded by the Governor of Kerala, R. S. Gavai, to prosecute Pinarayi Vijayan, the Kerala State Secretary of the CPI (M), in the SNC-Lavalin case has been criticised widely for its constitutional impropriety and bias. Given that a senior leader of the CPI (M) has been accused of “corruption”, national and local media have given wide coverage to this case.

What is extraordinary about the Lavalin case is that while it is called a “corruption case”, no one, including the Central Bureau of Investigation (CBI), has claimed that Pinarayi Vijayan financially benefited from the contract. In essence, it is a “corruption case without corruption.” I would argue in this article that the SNC-Lavalin controversy is yet another example of public controversies generated against the CPI (M) by an anti-CPI (M) clique, which includes a section of the mass media in Kerala as well as the United Democratic Front (UDF) leaders. The Lavalin controversy began in 2004 on the basis of alleged remarks in a confidential draft of the Comptroller and Auditor General’s (CAG) Inspection Report. These remarks were selectively leaked to the media and a cloud of corruption was sought to be created around CPI (M) leaders, particularly Pinarayi Vijayan, who was the Minister for Electricity between 1996 and 1999 in the Left Democratic Front (LDF) government. A careful examination of the facts in the case will reveal the hollowness of many arguments related to the case.

THE ORIGINAL AGREEMENT

Pallivasal (1940-41), Sengulam (1954-55) and Panniyar (1963-64) are among the first generation hydro-electric projects in Kerala. By the 1990s, 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 upgrade and modernise these power projects. For this purpose, the UDF 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. As per this MoU, the Export Development Corporation (EDC) of Canada agreed “to provide a financing package for the supply of Canadian goods and services” for the upgradation of Pallivasal-Sengulam-Panniyar projects (hereafter PSP projects).

Later on, Padmarajan’s successor G. Karthikeyan, the new Minister for Electricity in the UDF government under A. K. Antony, visited Canada on February 24, 1996 and signed an agreement for the 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 an integral part of the contract. Annexure B of the agreement provided the list of “Canadian financed Goods and Services,” their prices and an estimate of the overall cost to be financed by Canadian export credit.

LDF GOVERNMENT’S EFFORTS

When the LDF returned to power in May 1996, the power situation in Kerala had reached crisis proportions. The State was going through three-and-a-half hours of load shedding for domestic consumers and 95 per cent power cut for industries. The Kerala State Electricity Board (KSEB) was facing a major financial crisis. In such a scenario, the LDF government took measures to complete the ongoing projects on war footing. It also initiated a few 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 in 2001.

A key feature of the LDF government’s approach was the insistence on a transparent process of procurement. Not a single project initiated during the 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 Kuttiyadi Additional Extension (100 MW) scheme, which were initiated by the LDF government. The Kozhikode thermal project was also tendered and was executed by BHEL. In contrast, under earlier UDF regime, not a single power project was contracted through open tender, including the now controversial PSP projects. Further, most of these projects were contracted to MNCs.

LIMITED OPTIONS

After the formation of the government in 1996, the LDF ministry faced a 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, for which the UDF had already signed MoUs and power purchase agreements (PPAs), had not been initiated. In the case of the Neryamangalam and Sabari hydel projects, the LDF government decided to ignore the MoUs and go for a 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 that we are discussing, a MoU as well as an agreement were signed with SNC-Lavalin by the UDF government. As per the terms of the agreement, only the 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 lowering a number of charges included in the agreements between SNC-Lavalin and the UDF government. The details are given in Table 1.


The last component in Table 1 – the grant – was to be arranged by SNC-Lavalin from different Canadian aid agencies for setting up a modern cancer hospital (the Malabar Cancer Centre, MCC) in Malabar. Subsequently, on July 6, 1998, two addendums to the original agreement were signed for the 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.

THE CRITICISMS

A number of criticisms have now come up in the media, as well as in the CBI charge sheet, on the procedures followed by the LDF government in signing the agreement. The main arguments are the following:

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. The E. Balanandan Committee’s recommendation against going in for comprehensive upgradation of the above projects was ignored by the LDF government;

3. The LDF government disregarded the offer from the public sector BHEL and chose the Canadian MNC, which quoted a higher rate than BHEL for the contract;

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.

First, the critics of the LDF ignore the simple basic fact that it was the UDF government that 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.

Secondly, the E. Balanandan Committee was appointed by the LDF government to suggest measures to improve the functioning of the KSEB, short-term steps to manage the power crisis and a long-term policy for the acceleration of power generation. The Committee had submitted its 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 subsequently accepted and implemented by the government.

Thirdly, it is a brazen lie that the LDF government had ignored a lower quotation offered by BHEL and chosen to give the contract to a MNC. As noted earlier, the MoU route and the foreign consultant were chosen by the UDF government. The so-called lower offer from the BHEL is only a figment of imagination; this fact was confirmed by a written reply in the state legislature by the UDF’s Electricity Minister Kadavoor Sivadasan on October 23, 2001. The rejection of an offer from BHEL being referred to was not for the PSP projects, but for the Kuttiyadi project during the UDF rule between 1991 and 1996.

Fourthly, the most serious charge 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. In fact, the contract entered between KSEB and SNC-Lavalin on February 24, 1996 (during the UDF regime) was a contract that also included the 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 B, it is mentioned that:

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 was a fixed price contract, and the subsequent LDF government was faced with a fait accompli from which there was no scope for backtracking. All that could have been done was to reduce the cost of goods and services, which the LDF government succeeded in doing (see Table 1).

PRICE COMPARISONS AND IMAGINARY LOSSES

A question that remains is whether the pricing in the contract of $ 59.95 million (Canadian dollars) was excessive or not. These 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 indicate that the Export Development Corporation, Canada had indeed taken price offers from qualified Canadian companies before the agreed 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 of February 1996.

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

Critics of the LDF have repeatedly made price comparisons with the costs per unit of MW in the Neryamangalam hydel upgradation project and the SNC-Lavalin project. As per the so-called CAG audit report, the cost in the former was only Rs 1.07 per MW as against Rs 2.24 per MW in the latter for the PSP projects. Based on this cost comparison, it is alleged that the SNC-Lavalin derived undue benefit of Rs 110 crore 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 the scope of work in the Neriyamangalam project included only the rewinding of 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.

The high voltage slander campaign against the CPI (M) 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 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 audit report of the CAG, if the KSEB and the Electricity Department had given proper and timely responses to audit queries.

MoU v/s GLOBAL TENDER: THE UDF’s ADMISSION

G. Karthikeyan, the Electricity Minister in the UDF ministry who had signed the 1996 agreement, admitted while participating in a debate in the state assembly that the contract was a package and global tenders could not have been invited. In fact, when Karthikeyan became a Minister midway through the UDF regime, a MoU and “consultancy” agreement had already been signed with SNC-Lavalin by his predecessor C V Padmarajan for the extension of Kuttiyadi hydroelectric project. Addendum agreements for the supply of goods for the Kuttiyadi extension scheme were signed by Karthikeyan on 24 February 1996, and on the same day, the “consultancy” agreement for PSP projects was also signed. The ex-UDF minister admitted in the assembly that he had no option but to go for global tender in the Kuttiyadi project.

THE 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. However, 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 UDF government (2001-2006) that followed the LDF government (1996-2001). The then UDF government 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 renovation was rendered wasteful due to the non-achievement of pre-renovation generation levels is also baseless. The UDF’s Electricity Minister, in an answer to a question on the floor of the state assembly on July 22, 2005, stated that the installed capacity of the PSP project was 114 MW and the installed capacity after renovation was 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 teething troubles as well as inevitable gestation periods of new machinery and fluctuations in water flows.

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 added it to the alleged loss incurred as a result of the Lavalin deal. Again, the UDF’s Electricity Minister himself clarified the reasons for the delay in completion of the project in the state assembly on February 10, 2005: “in the case of Pallivasal-Sengulam-Panniar projects,…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, (and) there occurred a short time overrun. Nevertheless all these problems have been overcome and the projects completed.”

THE MALABAR CANCER CENTER

Finally, we shall take up the controversy regarding the Malabar Cancer Centre (MCC), which was to be setup with the grant from Canadian aid agencies. Canada and many 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 Kuttiyadi project also, which was entirely finalised by the UDF government of 1991-96, there was a grant component, which was to be utilised for strengthening the electricity distribution system in Malabar. From the beginning of the negotiation process for the PSP project by the UDF government too, the grant component was a subject of discussion. The grant component initially proposed was Rs 46 crore, i.e., equivalent to 30 per cent of the project cost for educational/health/environmental schemes in the project region (see Table 1). During the ministerial level negotiations in October 1996, the issue of 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 the cancer hospital with an outlay of Rs 103 crore. The government of Kerala was to contribute Rs 5 crore towards land and related infrastructure development. The remaining Rs 98 crore was to be a grant from Canadian aid agencies. Representatives of CIDA and the Quebec provincial government had participated in the discussions on Malabar Cancer Centre (MCC). The government entered into a MoU with SNC-Lavalin, according to 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 a cabinet decision.

The MCC 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, after which foreign aid to India dried up significantly. Nevertheless, nearly Rs 15 crore of Canadian grant was received and the first phase of the construction and establishment of MCC was completed.

This was the stage when the UDF came to power – in 2001. The UDF was not enthusiastic about implementing the hospital project for political reasons and neglected the follow up to the MoU so that it could be converted into an agreement. Not only was the MoU not converted into an agreement, but the MoU itself was also not renewed and allowed to lapse. The UDF government failed to send even a letter of appreciation for the completion of the first phase, which could have been used by SNC-Lavalin to arrange additional funds. 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 Canadian aid. In a letter in December 2002 to the then Chief Minister A. K. Antony, SNC-Lavalin had requested (a) more frequent meetings and consultations; (b) signing of the draft agreement for the hospital; (c) a joint communication campaign; and (d) speeding up of the civil works. Kerala government did not even give a formal response to this letter. Consequent to the new policy of government of India regarding receipt of foreign aid, the then Canadian High Commissioner informed the Government of Kerala that Canada could no more provide aid to official agencies like the government. The Government of Kerala failed to respond and inform the High Commissioner that the Government of India’s new policy was applicable only to new aid programmes and not to ongoing programmes.

Needless to say, all the wild charges of siphoning of hospital funds by the CPI (M) are totally baseless. Canadian aid could only be routed to agencies agreed up on in the MoU, and by following FCRA regulations. The Technicalia Consultants, Chennai was given the contract for the construction of the hospital and the Canadian aid for the expenditure incurred was directly paid to them. As per Government of India’s order No.11/21022/94(506)/2000-FCRA.IV (dated April 26, 2001), the Ministry of Home Affairs had regularised the payment of Rs 13 crore made for the hospital project. 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 state cabinet, has the Chief Minister as the Chairman of the Governing Council.

It appears that the enthusiasm of SNC-Lavalin, which had agreed to arrange for the grant, waned after sometime. It is said that 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 MCC project has been thoroughly exposed. They had failed to effectively pursue the issue because of political reasons. The CPI (M) had publicly criticised the UDF government’s inaction a number of times. In the background of mounting criticism, even the leading anti-Communist daily Malayala Manorama wrote an editorial in 2002 criticising the UDF government for politicising the hospital 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.

THE POLITICAL CONTEXT TO THE CASE

The UDF in Kerala has raked up the Lavalin case for explicit political objectives. Soon after the UDF government came to power in 2001, a number of UDF MLAs submitted a memorandum to the then Chief Minister A. K. Antony demanding the 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 Subject 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 in March 2003. The decision was clearly politically motivated.

The Director of Vigilance submitted his report in February 2006. On the basis of its findings, cases were registered against eight officers of the KSEB. The vigilance report specifically cleared Pinarayi Vijayan of any wrongdoing as Minister of Electricity. The report also noted that the original MoU signed in 1995 was not based on any feasibility report and the subsequent consultancy agreements signed in February 1996 were based on a dubious feasibility report. The UDF was in power and G. Karthikeyan of the Congress party was the Minister for Electricity.

Unhappy with the vigilance report clearing Pinarayi Vijayan, the then Chief Minister Oommen Chandy took a cabinet decision to hand over the case to the CBI in March 2006. Strangely, the CBI’s charge sheet named Pinarayi Vijayan as a participant in criminal conspiracy and made him the 9th accused in the case. Interestingly, G. Karthikeyan was not named as an accused.

As Pinarayi Vijayan was a public servant during the case, the CBI requested the Kerala Governor R. S. Gavai for permission to prosecute. On the Governor’s reference, the State government sent the details of the CBI’s application to the Advocate General (AG) C. P. Sudhakara Prasad. The AG’s advice to the government was clear: the details provided by the CBI do not provide any prima facie evidence to show that Pinarayi Vijayan was part of a criminal conspiracy. Excerpts from the AG’s advice to the State government are worth quoting:

While it is mentioned at many places in the CBI report that it was G. Karthikeyan who initiated the criminal conspiracy, the report also says that there is no evidence against him. If we examine the case on this basis, the conspiracy case against all the alleged conspirators becomes weak. As the CBI report itself is saying that there is no evidence against the person who initiated the conspiracy, the alleged conspiracy itself does not legally stand…

…The CBI report says that G. Karthikeyan was exonerated because there was no evidence to show that he financially benefited from the deal. Applying the same criterion, Pinarayi Vijayan should also have been exonerated, as there is no evidence for his benefiting financially from the deal also.

On the basis of the AG’s advice, the State cabinet decided not to accord permission to the CBI to prosecute Pinarayi Vijayan, and accordingly informed the Governor of its decision. In normal course, the Governor should have accepted the advice of the cabinet or should have returned it to the cabinet with comments. However, in a strange turn of events, the Governor put on the jacket of a detective and summoned more information from the CBI. On the basis of his discussions with CBI officials, the Governor gave a letter directly to the CBI according permission to prosecute Pinarayi Vijayan.

The above decision of the Governor, a political appointee of the central government, has given rise to protest in constitutional and legal circles. As Justice V. R. Krishna Iyer noted in his article in The Hindu,

The rule democracy implies is that the Governor is the ceremonial head and real power of administration remains with the Council of Ministers. To assume, as the Opposition in Kerala does, that the Governor has the free and indiscriminate discretion to substitute his judgment for that of the Cabinet is a grave outrage. Can a Governor assume all executive power and refuse to sign legislation passed by the legislature and negative judicial decisions? Then, our Constitution will be reduced to paper tyranny. The implications of the Governor being treated as vested with absolute power are dangerous.

This is where the Lavalin saga is now. The CBI case and the Governor’s action are aimed at sustaining a smokescreen of corruption to politically malign the CPI (M), at least till the next Assembly elections in 2011. The CPI (M) has stated that the case is politically motivated and that it would deal with the case “politically and legally.”