Power sector woes

Competitive bidding without delays can help

Leading power equipment manufacturers belonging to the private sector have complained to the Union government that many state-owned power utilities have abandoned the principle of awarding engineering, procurement and construction (EPC) contracts through competitive bidding, and instead nominated them to state-controlled Bharat Heavy Electrical Limited or BHEL. They fear that more such contracts would be awarded to BHEL through nomination, and this would deny them an opportunity to compete for such projects resulting in loss of business when demand in this sector has already declined significantly. It has also been argued that since the law in the country mandates tariffs to be determined on the basis of transparent bidding of projects, award of contracts through negotiations violates the spirit of the Electricity Act. BHEL, however, has denied these charges claiming that it has been winning contracts mostly through competitive bidding and only 18 per cent of all its orders in the last three years have been awarded on a negotiated basis. In any case, the company has argued, prices of all such negotiated orders are benchmarked to recent contracts won through competitive bidding, suggesting thereby that the spirit of the law has not been violated.

Certainly, the problems facing the power equipment manufacturers have worsened because of the sluggish demand in the power sector. Last year, no new major power project was announced apart from the planned capacity addition of 20,830 Mw. As a result, only six big EPC orders were finalised last year in the power sector, half of which went to BHEL. The order book position of the Indian power EPC industry is estimated at 20,000 mw, with BHEL accounting for over 40 per cent. Even BHEL saw its order book decline by 20 per cent last year. Larsen & Toubro, another major player, saw its orders fall by 57 per cent. The demand from private sector power equipment manufacturers to put an end to negotiated award of contracts is thus a direct outcome of their order book crisis.

It is true that there can be no debate over the principle of price discovery through a competitive bidding process followed for awarding EPC contracts. Competitive bidding not only helps discover the price of a product or a service in a transparent and non-discretionary manner, but it can also help keep a check on prices. Yet the current reality in India's power sector is that attempts have been made more than once to bypass the time-honoured principle of competitive bidding. Some years ago, several power projects in the country placed orders for import of power equipment on Chinese companies through negotiations, shutting out competition from domestic players. The argument, then and now, has been that even negotiated orders are usually placed at a price benchmarked to those awarded through competitive bidding. An additional argument cited in favour of negotiated orders is that many power utilities prefer this route to ensure early finalisation of orders so that the projects can start generating power, preventing time and cost overrun. The question that the power equipment manufacturers and power utilities must address is whether they can agree on a competitive bidding process that can be completed without any time or cost overrun. Negotiated orders are prone to corruption, nepotism and inflated costs, particularly when these are to be placed by state-owned power utilities. If BHEL claims it can make the best offer to win contracts, it surely can do so through a competitive bidding process as well. There is no reason why competitive bidding can't be made to work effectively and efficiently without any delays.