Dwelling in darkness


Again, people used to loose-talk will rediscover ‘kickbacks’ to hound the government. But chief minister Omar Abdullah can accept the court verdict and allow the Norwegian consortium to implement the 1200-MW Sawalkot project, J&K’s cheapest ever energy source, a Kashmir Life report.

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Ghulam Nabi Azad
Ghulam Nabi Azad

Since November 11, 2006, when the then chief minister Ghulam Nabi Azad cancelled the agreement with a Norwegian consortium for building the 1200-MW Sawalkot power project, the government has been defending the decision. Last Monday (February 1), it lost its case and its face as Mr Justice J P Singh observed the cancellation order was arbitrary, non-speaking, unfair, hasty and against the principles of natural justice that denied the contractor the right to be heard. Costs were imposed on the government also.

The 38 months litigation may or may not have satiated the ego of the ‘chosen few’ who imposed the cancellation decision on J&K, but it severely impacted a water abundant, energy starved state that would have had a project almost half way through. The project would generate the cheapest energy in India but delay would add up the costs, a bit, if at all the government wants its implementation now.

A run of the river project on Chenab almost equidistant from Salal and Baglihar, Sawalkote has been a controversy since July 12, 1997 when the then NC government offered it to limited bidding to M/S Skanska, Black & Veach India, SNC Lavallin, Voith Hydro, Daewoo Corporation Pvt. Ltd, and Statkraft Anlegg / Kvaerner Energy (SA and KE).  Even the Jaypee Industries Ltd (that implements the Baglihar) also furnished an offer in March 2001.

Envisaging a Roller Compacted Concrete (RCC) gravity dam of 197 m height with maximum regulated water level to be 697 m. a.s.l, project reservoir will have an inundated area of about 9 sq km in addition to the present river area of about 2.5 sq km. As many as 600 houses with 2500 souls will get displaced. It will have two underground power stations which would utilize an average river flow of 833 m3/s (cubic meters per second) each to yield about 4,000 Gigawatts of electricity annually. Larsen & Toubro (L&T) has already laid the 18-km access road from the Srinagar-Jammu highway.

On basis of its offer to arrange 85 percent of the project cost through export credit and domestic financing and completing the project in 78 months, state run Power Development Corporation (PDC) entered into an MoU with Norwegian SA/KE on July 26, 1999. For 600 MW, it was costing Rs 7.5 crore per MW.

By then, there was a change in Norway. KE was acquired by General Electric and quit the consortium. In 2000 SA was bought by NCC International. It set up Sawalkot Consortium (SC) to implement the project with German Hochtief Aktiengesellshaft as its partner. With the DPR, the SC gave the Engineering-Procurement-Construction (EPC) offer which was lower by Rs 240 crore than the JIL and was approved by M/S Lahmeyer International (JKPDC’s technical advisers) so it bagged the contract. An EPC contract was signed on April 21, 2001 in Delhi in presence of visiting Norwegian Prime Minister. It triggered a major controversy as the union power ministry opposed the deal apparently because it wanted the project to go to NHPC. But Dr Farooq Abdullah got the deal inked and approved it in his cabinet two days later.

Taj Mohiuddin
Taj Mohiuddin

Then, SC was supposed to set up 600 MW first phase at a cost of Euro 517 millions and Rs. 986 crores. It also offered completing of next phase of 600 MW for an additional Euro 204 million. Then the entire 1200-MW project, if implemented, would have cost Rs. 4879.40 crore.

As SC was considering suggestions by possible financers like Power Finance Corporation and other banks of reducing the export credit and enhancing its capacity for better economic viability, it faced a problem. NCC-AB, a partner of the SC, decided against implementing projects abroad but set up a Special Purpose Vehicle (SPV) – Sawalkote Prosjektutvikling (SPAS) in February 2004 for implementing the Sawalkote project. By September 2004, the Germans had also left the SC.

By then, J&K had undergone a change of guard. It was Mufti Sayeed heading a coalition in Srinagar and whispers about ‘kickbacks’ were moving faster than files in the civil secretariat. As the SPAS and the new government started picking up the threads, re-evaluation of the whopping investment became inevitable. Then, state’s economic adviser Dr Haseeb A Drabu headed the high-level Sawlakote Committee. On September 8, 2004 the SPAS was suggested by the committee to reduce the total project cost by getting Indian partners and reducing Euro currency exchange risk without altering any line of the April 2001 contract. It took the Indian construction major HCC and a less-expensive Turkish dam major Özaltin Construction as two partners.

After a series of meetings, on February 3, 2005 EPC cost of the project was drastically reduced to Euro 750 million from Euro 967 millions while the project capacity doubled to 1200MW. It was a net saving of Euro 217 millions (then Rs 1247.75 crore) – Euro 73 million in direct costs, Euro 90 million on account of devaluation of rupees during the two contracts and Euro 54 million by reducing the foreign exchange risk in the new contract.

Officials associated with the exercise said the cost-reduction was the outcome of restructuring. “PDC saved money on three counts – reduction in direct costs, devaluation of rupee and preventing exchange risk by reducing expatriate costs, implementing a more favourable currency mix and adopted the innovative mezzanine financing,” one of the policy makers told Kashmir Life. “State’s equity participation was increased from 15 to 30 percent and the export credit was reduced to around 30 percent as the balance requirement would be managed in the domestic market through Power Finance Corporation (PFC). We reduced the duration of implementation by one year.”

It would mean getting power at throwaway costs of Rs 2.05 a unit in 2014, which was around one third of what PDC is getting from Baglihar right now. But the deal fetched much more. As a goodwill gesture, a senior executive of the SPAS told Kashmir Life, the consortium agreed to set up two to three mini hydropower power projects in the state up to total 10-MW capacity free of cost. The consortium agreed it will not dismantle any of the civil structures after the project completes. This includes a Rs. 320 crore township (around Euro 60 million) for over 2500 families with facilities of education and healthcare.

Besides, certain new conditions were laid. The cost at the time of signing the contract will not be impacted by any escalation. A punishment clause was introduced that would lead to cost cuts in case of delay beyond 7.5 years. All the three partners in the consortium were made jointly and severally responsible for the completion of the project – if any of the three partners backs out, the rest of the two will have to complete the project within the stipulated time.

In April 2005, a PDC delegation with its consultants Lahmeyer International visited the project sites of the consortium members for due diligence. They favourably reported to the PDC board on their return about the capacity of the consortium partners.

Ghulam Hassan Mir
Ghulam Hassan Mir

A change had taken place, again, this time in Srinagar. When the file was placed before the then chief minister Mufti Sayeed, he said it would be improper to sign it because he is transferring the reigns of power to Ghulam Nabi Azad. After the new government took over, files were readied and the approval was announced by the cabinet on December 19, 2005. An addendum was issued by the government in its order on April 4, 2006 protecting the EPC contract costs from any escalation. It was projected as the best deal ever – 1200-MWs at Rs 7000 crore (Euro 415 million + Rs 1926.25 crore) in 2014 on turn key basis and no escalation. By then, SPAS MD Henning Fjeldstad had flown to the site and announced beginning of tunnelling in 2007.

With a debt equity ratio of 70:30, the state government will pay 10 percent of the equity against bank guarantee to the consortium at financial closure and another 10 percent when the work begins. While almost 70 percent of the project cost needs to be arranged by Indian financial institutions supposed to be led by Power Finance Corporation, the balance credit will be arranged by SPAS through export credit involving GIEK and Eksportfinans of Norway. Policy makers in the state were seriously considering getting concessions of a mega hydel power project from the central government, which would enable to reduce the costs further.

SC had negotiated a deal with Norwegian FI Eksportfinans and on “very favourable terms” it had secured Euro 327 million loan. It was being revalidated as it was nearing expiry.

Post-decision, there were bouts of happiness that eventually dragged ‘kickbacks’ back to the political ‘kitty-parties’ discussions in bars and ballrooms. Interestingly, those leading the whisper-campaign were a grand cocktail of coalition government – Taj Mohi-ud-Din, Ghulam Hassan Mir, Hakeem Mohammad Yasin, Mohammad Yousuf Tarigmai, and … As per the 62-page verdict of Mr Justice J P Singh quashing the government’s cancellation order, it was one of the ministers who brought it to the notice of chief minister that there was “a widespread whispering campaign regarding the transparency of execution” of Sawalakote project. He had even claimed to have prepared “a comprehensive report detailing all the facts after examining details of the contract.”

State Power Ministry suggested to the chief minister that a legal opinion would be arranged but the verdict says it never came. Actually the chief minister set up a sub-committee on October 19, 2006 (Abdul Aziz Zargar, Qazi Afzal (PDP), Hakim Yasin (independent), Taj Moh-ud-Din and Nawang Rigzin Jora (Congress)) that met on November 13 and later on November 15. It did not take much time to decide that the deal was a fraud as it did not upheld the principle of competitive bidding that the central government wants in major power projects. Interestingly, it skipped meeting even a single official who was involved with the project from the day it was conceived, negotiated and later re-negotiated. It spent “quite a few minutes” in going through the “heaps of documents” that power officers placed before them after photo-copying them for the whole night. In post haste, the recommendations were placed before the cabinet as a non-agenda item and a decision superseding the December 21, 2005 order was taken cancelling the contract.

For SPAS, there was only one option – approaching the court. It did. The verdict came on Monday last upholding the widely believed theory that the government decision was wrong and lacked any weight. The verdict pronounced by Justice Singh questions the propriety of the state government of placing the same minister in the cabinet sub-committee who had made the complaint. The verdict has lamented the government’s failure in hearing the consortium that was associated with the project for seven years.

The consortium has proved the issue of competitive bidding is no binding on projects implemented by the state governments. It has, interestingly, referred to a letter dated April 19, 2001 that competitive bidding route was not applicable to the Sawlakote project. Tragically, the state bureaucracy was in receipt of the letter but it is nowhere listed in the records placed before the cabinet sub-committee!!!

Energy is always in demand, especially if it is clean, cheap and available. It is money guzzler because it is capital intensive. And the larger reality in India is that investment in a few sectors including power is actually helping political parties to survive. Neither of the politicians who were responsible for scarping of the deal can be accused of seeking their part of the cake in the deal. Because there is nothing on record against them other than their complaints accepted by chief minister but proved hollow by the court. However, there were reports in the media saying they were acting upon directions of a senior congressman in Delhi. And this too is a reality that the NHPC was initially seeking Sawlakote to make it its another possession. Once, the state’s National Conference government during its last tenure put its foot down, union power ministry later offered a joint venture.

The damage, however, is done. Barring an exception, all those politicians who were against the deal, are still in power. They have lost nothing. In fact, they were flattering their stout egos that they are capable to undo things, precisely the capacity they have.

But J&K has lost a lot. Its dream of having additional 1200-MW is a dream three more years away. A year in delay of Sawlakote implementation means a net loss of Rs 1500 crore and by now J&K has lost Rs 4500 crore and started losing another Rs 1500 crore in 2010. The project is still viable but more costly because it would require adding the inflation that India witnessed in last three years. There is possibility of the SPAS not getting the export credit at the terms and conditions it had negotiated earlier. Its deal with the Norwegian creditors has already elapsed.

Dr Haseeb A Drabu
Dr Haseeb A Drabu

And the larger damage is to the credibility of J&K state that it has the capacity of entering into agreements but lacks will to respect them. But this all depends how Omar Abdullah’s government’s takes the verdict. He has many naysayers around who would still like to go for the appeal before a superior court. Omar Abdullah has to take a decision. A decision he must take to prove himself a visionary, a decision that only will prove that his predecessors had shades of myopia.


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