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Power equipment manufacturers have complained to the government of anomalies in awarding engineering, procurement and construction (EPC) contracts as a demand shortfall continues to hobble the sector.
Represented by the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (Ficci), which have written to the power ministry, private equipment makers like Alstom, Bharat Forge, Larsen & Toubro and Toshiba have complained that state utilities are nominating central public-sector undertaking Bharat Heavy Electricals Ltd (BHEL) for projects. Business Standard has reviewed both the letters.
"We understand that a few state power utilities are of late contemplating bypassing the tendering process and awarding power plant EPC contracts to CPSUs (central public-sector undertakings) on nomination," said the Ficci letter to Minister of State for Coal, Power and Renewable Energy Piyush Goyal.
A BHEL spokesperson, however, said the company had been winning contracts mostly against international competitive bidding (ICB). "Certain customers, both in the private and public sectors, when they see certain specific advantage - like early finalisation of order to facilitate early generation - resort to negotiated deals with BHEL. Prices of such negotiated orders are benchmarked to other recent orders finalised on an ICB basis. During 2012-13, 2013-14 and 2014-15, about 18 per cent of the orders received by BHEL were on a negotiated basis."
The industry letter cites a recent memorandum of understanding between BHEL and the Telangana Power Generation Corporation for three power plants with a cumulative capacity of 5,880 Mw. This roughly translates into Rs 26,460 crore of orders.
The order book of the Indian power EPC industry is 20,000 Mw, or around Rs 90,000 crore, and BHEL has a 40 per cent share of this.
"Tariff for supply of power from state power companies is determined on a cost-plus basis as provided in Section 62 of the Electricity Act, 2003, and not on the competitive price discovery mechanism under Section 63. This is against the spirit of the Act," said the CII letter to the power secretary.
Power transmission companies had recently complained of state-owned Power Grid Corporation being nominated for major projects.
"Not a single project was awarded from the power sector during the past year. Demand is subdued, with only NTPC and some state power companies issuing tenders," said an executive with a leading power EPC company.
The CII letter also said "more states intend to follow the practice of placement of orders on a nomination basis". Industry sources said states expected to do this were Andhra Pradesh, Haryana, Maharashtra and Uttar Pradesh.
The equipment manufacturers are contemplating approaching the Central Electricity Regulatory Commission over flouting of the Electricity Act and the Central Electricity Authority, to seek a proper mandate for awarding EPC contracts.
The BHEL spokesperson said both the Agreement on Government Procurement (GPA) of the various WTO member countries and the guidelines of Central Vigilance Commission did not debar ordering on a negotiated basis. He said a number of private customers had placed orders of more than 50,000 Mw on a negotiated basis on Chinese manufacturers. "No concerns whatsoever had been expressed by any agency in this regard. Later on, it emerged the Chinese sets were far inferior to BHEL sets, as brought out in the report of the study carried out by CEA issued in May 2013. In addition, most domestic private manufacturers have been booking large orders on a negotiated basis," he said.
During the past decade, bulk tenders for power projects were offered to BHEL. After 2008, procurement was opened up for private companies through competitive bidding.
Growth expected in capacity, however, was not achieved because demand has remained subdued, first over fuel supply and now because distribution companies are not buying power.
The order book of leading players in the power EPC segment has declined. BHEL saw its power sector orders falling to Rs 20,433 crore in 2013-14 from Rs 25,560 crore the previous year. The power order inflow for L&T decreased 57 per cent in 2013-14 to Rs 3,513 crore.
While the profits of Alstom T&D suffered mildly, the company in its last annual report said: "Stalled projects severely affected the balance sheet of the corporate sector and public-sector banks, which, in turn, limited private sector investments."
According to an analysis done by Business Standard in December last year, the Indian power sector was looking at an empty pipeline of capital investment with no leading player planning any fresh project.
