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T.E. Raja Simhan

Chennai, June 21 Shipping Corporation of India (SCI) had incurred an additional expenditure of Rs 554 crore by splitting the procurement of very large crude carriers (VLCCs) during the Tenth Plan period (2002-07), says the Comptroller and Auditor General of India in its 2007 report.

The SCI proposed in October 2001 to acquire four VLCCs during the Tenth Plan period. During 2002-03 it proposed a plan outlay of Rs 1,735 crore, which included Rs 591 crore for four VLCCs to be financed at 20 per cent from internal accruals and 80 per cent from external sources.

However, SCI’s management committee in October 2001 decided to acquire only two VLCCs in 2002-03. The Centre in May 2002 approved an outlay of Rs 1,332 crore, including Rs 296 crore towards two VLCCs.

In June 2003, SCI placed orders for two VLCCs costing $130 million (Rs 620 crore), payable in five equal instalments. The ships were received in January and August 2005. SCI signed another contract in 2005 to receive two vessels at a cost of $258.20 million (Rs 1,164 crore), the CAG said.

It was observed by the audit (August 2005) that while considering the approval for purchase of two VLCCs in March 2003, SCI noted the following:

• Demand for VLCCs was increasing due to its economies of scale and development infrastructure at Indian ports. [According to the executive summary of the project report submitted to company’s board in November 2002, Indian Oil Corporation was chartering each month two VLCCs and Reliance four.]

• SCI did not have any VLCC as the previous one was scrapped in 2000 without any replacement.

• The estimated profitability, even on a conservative basis, was quite high. Even on the basis of an assured charter hire of $35,000 a day to be received from oil companies (against the prevailing rate of $50,000 a day) and an estimated cost of $75 million for a VLCC (against the firm price of $65.2 million), the internal rate of return worked out to 23.35 per cent.

• Prices of shipbuilding were amongst the lowest in the past ten years.

• The manufacturer had offered deferred payment terms.

The audit noted the long lead time (from March 2002 to June 2003) from the date of invitation of tenders to the signing of the contract with the shipbuilder. Further in 2005-06, SCI hired VLCCs on 18 occasions and paid $28.11 million (Rs 126 crore). In spite of such favourable returns and surging demand for VLCCs, the company’s decision to split the procurement of ships resulted in extra expenditure of $127.80 million (Rs 554 crore), the CAG said.

The SCI in its reply in February 2006 said that the procurement of the two VLCCs was postponed due to the company’s cash flow position and its consequential effect on the other schemes in progress. The Shipping Ministry in February 2007 endorsed the management’s views. Further, the future price of VLCCs could not be anticipated at the time of decision-making and that decisions were taken on various shipbuilding projects according to its cash flow/reserve situation, keeping in view the priorities for different projects.

But the CAG said the reply was not tenable because the SCI estimated net cash inflows of Rs 231 crore; Rs 142 crore; Rs 243 crore and Rs 219 crore in 2003-04 to 2006-07. SCI had adequate cash to meet its requirement of 20 per cent financing from internal sources for four VLCCs, because cost of vessels was payable in a phased manner.

SCI actually generated adequate internal resources and deposited surplus funds with banks/financial institutions. The actual cash and bank balance was Rs 387 crore and Rs 1,721 crore as on March 31, 2004 and 2005 respectively after paying the dues for two VLCCs, says the CAG report.

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