New Delhi: The government, already under fire for irregularities in the allotment of captive coal blocks, may encounter more trouble, with two consultants and a government official admitting that there have also been significant irregularities in assuring supply of coal to private sector power projects.
Such supply—termed a coal linkage—pertains to only those projects that do not have a captive coal block and instead need to source coal commercially from state-owned Coal India Ltd (CIL)—the only company allowed to undertake commercial mining of the commodity in the country.
To take advantage of the discounted price offered by CIL for such assured supply, the developers of power plants allegedly made false claims regarding the order of equipment, financial status, land acquisition and water supply.
Amol Kotwal, associate director, energy and power systems practice, for South Asia and the Middle East at Frost and Sullivan, said: “Companies followed unfair practices for securing coal linkage for the proposed power plant projects. In a few case, companies which were new entrants in the power sector and not having requisite financial strength, managed to secure the coal linkages in spite of competition from some of the power sector biggies.”
CIL has assured supply to 172 power projects through so-called LoAs or letters of assurance. The generating capacity involved is 108,878 megawatts (MW). The number doesn’t include assurances for projects commissioned before March 2009.
To be sure, CIL has been unable to meet its commitments.
Several firms assured of coal supply claimed to have placed orders for power generation equipment with manufacturers to strengthen their candidature—only, these were not really orders.
“There were ways and means of securing coal linkage for the plant either through false equipment orders, extraordinary clout or political connections and doing away with scrutinizing or verification process of documents of such companies by concerned authorities,” Kotwal added.
An engineering, procurement and construction (EPC) contract works like this: the buyer identifies a supplier and awards it the contract, but this doesn’t become an order till the former pays an advance and sets a delivery date. Mint reported on 7 September that some companies had adopted a similar modus operandi to corner captive coal blocks.
Mint couldn’t immediately identify companies that indulged in such practices in a bid to strengthen their case.
Earlier, power projects were directly awarded coal linkages. However, scarce resources and increasing applicants prompted the government to introduce a system of awarding letters of assurance that required approval by standing linkage committee (SLC), a panel headed by a representative of the coal ministry and comprising representatives from the planning commission, ministries of power, shipping and railways, central electricity authority, central mine planning and design institute and CIL. These letters were converted to linkages after a project completed its financial closure.
Later, these linkages were converted into fuel supply agreements (FSAs), a legally binding document that requires CIL to supply the quantum of coal agreed upon.
This conversion is usually done after the project meets certain milestones in two years.
A senior government official familiar with the matter, who spoke on condition of anonymity, admitted that there were several irregularities in the process. “It’s true that many have cornered coal linkages on the basis of false information.”
India faces a shortage of coal and CIL mined only 431 million tonnes (mt) in 2010-11 against a target of 461.5 mt. Coal demand in India is expected to grow from 649 million tonne per annum (mtpa) now to 730 mtpa in 2016-17. The availability of local coal is estimated at 550 mt in 2016-17.
The process of selecting companies that were assured coal supply was as subjective as the process for allotting captive coal blocks and also involved factoring in recommendations from central ministries and state governments. Later, a point system was introduced for linkages for the 12th Plan (2012-17) projects.
States were happy to provide letters assuring water supply (a key requirement) to power plant developers, which signed in-principle agreements to set up projects.
“These anomalies have taken place. If all these projects come up, all the water in the Ganges would fall short. Similarly, lots of fake EPC contracts were awarded. Later on, some who got the linkages, substituted with proper EPC orders. Similarly, false financial claims were made. It was the only way to get a linkage. The system was reduced to a parody,” said the head of a Delhi-based power consulting firm who asked not to be identified.
A retired government official associated with the process, who didn’t want to be identified, said the process was transparent. “Whoever applied for coal linkages was awarded them, provided they met the conditions.”
An analyst disagreed. “Processes based on merit are as good as the implementation. With growing number of applicants for linkages, the process has been evolving to take care of emerging challenges. However, in any merit evaluation, subjectivity cannot be eliminated altogether, which is where the issues of equity and transparency arise,” said Dipesh Dipu, partner at Jenissi Management Consultants, a Hyderabad-based energy and resources-focused consulting firm.