New Delhi: State-owned Steel Authority of India Ltd (SAIL) has seen the estimated cost of its ambitious ongoing modernization plan increase almost three times over the four years since it began, prompting the Central Vigilance Commission (CVC), a Central oversight body, to question steel ministry officials about the steep rise.
From Rs34,982 crore in 2004, the estimated cost of SAIL’s modernization and expansion programme has touched around Rs90,000 crore after a review conducted by the steel maker’s board on 11 July, according to an internal report reviewed by Mint.
At the meeting of the board, it was assessed that the steel producer would now need Rs78,845 crore to finance its capacity expansion programmes.
It was also estimated that an extra Rs10,000 crore would be needed for parallel work such as mine development and construction of steel processing units, said a government official, who didn’t wish to be identified given the sensitivity of the issue.
SAIL chairman S.K. Roongta refused to comment when contacted by phone on Wednesday morning and did not answer subsequent calls.
In an emailed response to queries from Mint, a SAIL spokesman said that the steel maker needed more time to reply to specific questions.
According to the report, cost estimates for the company’s modernization projects have risen between 45% and 87%, from the initial figures, for work being carried out at the steel maker’s units in Bhilai (Chhattisgarh), Bokaro (Jharkhand), Durgapur (West Bengal) and Rourkela (Orissa). The cost estimate for modernizing SAIL’s wholly owned subsidiary IISCO Steel Plant in West Bengal rose a moderate 13.3%.
In 2006, SAIL had revised its estimates for the modernization cost to Rs53,924 crore.
“We are very concerned about the manner in which costs have jumped for these works. We understand that several cost components, which would cost ‘x’ in other countries, have been indicated as ‘3x’ by SAIL,” said a CVC official, who spoke on the condition of anonymity.
According to this CVC official, the main reason cited by SAIL officials for the rise in costs was the steel company’s dependence on overseas suppliers, who were in a position to dictate prices because of a global surge in demand for steel-making equipment, a consequence of the global boom in the alloy, and the resulting efforts by steel makers to expand capacity, or build new plants.
“We are at the early stages of our inquiry,” the official added. SAIL’s modernization and expansion plan, aimed at increasing the capacity of so-called hot metal to more than 25 million tonnes a year from the current level of 14.6 million tonnes, is expected to be completed by December 2010. Hot metal is essentially pig iron in liquid, or molten state that is manufactured by blast furnaces.
This hot metal, which has a high proportion of carbon, is then converted into steel in an electric arc, or oxygen furnace by burning off the excess carbon.
A steel ministry official said that there were very few suppliers for steel melting shops, blast furnaces and other critical parts that are required for the expansion.
“It is a sellers’ market and they (these companies) dictate the terms,” added the official, who did not wish to be identified.
The steel ministry official said that SAIL was depending on a couple of European suppliers for components such as steel melting shops and blast furnaces. He didn’t name the companies.
“We are in total panic and it is as if we have these suppliers pointing a gun to our foreheads,” the official added.
According to this official, there have been instances where the company received only single bids for critical tenders. “The suppliers quote high and simply refuse to re-negotiate.”
SAIL’s consultant for its modernization is Mecon Ltd, an engineering and consulting firm, which falls under the steel ministry. “We are not in a position to comment on this issue,” said a spokesperson for Mecon, when asked about the modernization.
A SAIL official familiar with the issue admitted, on condition of anonymity, that there has been a huge jump in costs, but refused to comment further. “We are trying to take steps to lessen the damage, but can’t discuss those measures with you.”
SAIL reported sales of Rs40,265 crore and a profit of Rs7,568 crore in the fiscal year ended March. For the quarter ended June, SAIL reported a 37% increase in sales to Rs11,029.40 crore and a 20.3% jump in net profit to Rs1,835.10 crore, on the back of a surge in steel prices.