CAG raps BHEL for ‘benefiting’ Megha Engineering

M Rameh Chennai | Updated on January 09, 2018 Published on August 13, 2017

Transaction relates to 2013 wherein the PSU had reduced the boiler price to ₹1,108 cr from ₹1,473 cr

The Comptroller and Auditor General of India in its recent report on ‘Competitiveness of BHEL in emerging markets’, has rapped the public sector engineering giant for lowering prices for its boiler and turbine, without due authorisation, benefiting Megha Engineering and Infrastructures Ltd (MEIL).

Against own rules

The observation relates to a transaction of 2013, when the Hyderabad-based MEIL won a contract to set up a power plant for SPEC Power Pvt Ltd. Megha, in turn, signed up to buy the boiler and turbine machines from BHEL. In April, BHEL agreed to sell boiler and turbine for ₹1,473 crore, whereas in December that year, it lowered the price to ₹1,108 crore.

Such downward revision of prices is not illegal, but in this case it violated BHEL’s own internal rule which said that price revisions should be authorised by both the Chairman and Managing Director and Director — Finance of BHEL. The required authorisation was ‘not found on record’, the CAG has observed.

The government of India, which responded to audit comments of CAG on behalf of BHEL, had said that MEIL had obtained an offer from a Chinese manufacturer and BHEL had to match it. To this, the CAG has said: “There was no mention of competition from Chinese firm in the price approval note dated November 16, 2013. Thus, the reduction in price was made against non-existent competition.”

The auditor has also not accepted the government’s defence that the price was lowered because the scope of work was also reduced, observing that “the reduction in scope was not significant to justify the price reduction.”

BHEL has not responded to BusinessLine’s e-mail seeking a comment.

Not competitive

The CAG’s performance audit report comes at a time when BHEL’s financial performance is down. Against its target of ₹1,00,000 crore of turnover for 2016-17, it achieved ₹28,871 crore. Net profit, at ₹455 crore, was 1.5 per cent of sales — down from a healthy 14 per cent in 2011-12.

Though the power sector in general has been in a decline mode in the last five years, BHEL’s poor performance goes deeper than that. The CAG, for example, notes that most customers make the final payment after BHEL completes ‘performance guarantee tests’.

The auditor has observed huge delays in conducting these tests, some times as many as 70 months after the commissioning of the projects. Rejecting the defence that the delays in doing the tests were due to non-availability of the power grid, the CAG has said that “delays in conducting PG tests up to 50 months cannot be solely due to non-availability of grid demand and other reasons.”

The auditor also points out other management failures such as BHEL not doing enough to stay competitive in the market. For example, while the company’s board approved rolling out an Enterprise Resource Planning (ERP) system — a management software that helps optimum use of all resources — back in November 2010, and the implementation was to be completed in 36 months.

Orders lost

As of June 2017, ‘the system is yet to be fully functional’. As a consequence, BHEL’s competitiveness slid and it lost market share to private players, mostly the Chinese. Between 2012 and 2016, it lost orders worth ₹17,097 crore due to pricing, delivery and technical reasons, and got itself disqualified in tenders worth another ₹6,000 crore.

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Published on August 13, 2017
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