Govt plans to ban E&Y from power sector

Move follows CAG report on lapses in award of UMPPs; Power Finance Corp bars audit firm for three years

India’s power ministry is considering not giving any consulting assignments in the power sector to audit and consulting firm Ernst and Young (E&Y) after a report by the government’s auditor pointed to lapses in the award of so-called ultra mega power projects (UMPP), a process in which the firm was involved as a consultant.

Mint has reviewed a copy of the report which also said that state-owned Power Finance Corp. Ltd (PFC), the entity in charge of bidding out the projects, has already barred “the consultant” for three years starting July. The report doesn’t name the audit firm, but it was the only consultant helping PFC bid out the projects in question. An executive at PFC confirmed that the agency has indeed barred E&Y.

Mint’s Utpal Bhaskar says the power ministry is considering a ban on consultancy firm Ernst and Young from the power sector

The consulting firm denied that this was the case. In an email response, the company spokesperson said: “We are not aware of any Comptroller and Auditor General of India (CAG) report on the working of special purpose vehicles (SPVs) in PFC. There is no subsisting order of debarment against E&Y by any government authority or public sector undertaking.”

CAG’s latest report, a follow-up to its earlier one on the way PFC bid out the projects, is with the power ministry for comment. A top power ministry official, who spoke on condition of anonymity, claimed that inclement action against the consultant is imminent.

“We plan to ban E&Y across the sector,” added this person. The power ministry, this person said, is waiting for the opinion of the law ministry on the proposed ban.

It isn’t clear whether the ministry’s action was prompted by the decision of PFC, which reports to it, or the report of the government auditor. PFC decided to bar E&Y for three years and also withheld Rs. 51 lakh of fee (according to the CAG report).

“As part of our responsibility, we barred E&Y and asked the power ministry to take steps for the sector. What we could do for PFC, we have done,” said the PFC executive mentioned above, who did not want to be identified.

According to the executive, the role of E&Y came under the lens as early as 2007 at the time of disqualification of the consortium of Lanco Infratech Ltd and Globeleq Singapore Pte, after it was discovered that the two consortium partners had misrepresented details in their winning bid for the Sasan power project. E&Y, this person added, had not discovered these misrepresentations in time.

E&Y was the consultant appointed to help PFC award the Sasan, Mundra and Krishnapatnam UMPPs.

The government wants to set up 16 such projects, each of which will generate 4,000MW of power; four of these have been awarded—at Mundra in Gujarat to Tata Power Co. Ltd, and Sasan in Madhya Pradesh, Krishnapatnam in Andhra Pradesh and Tilaiya in Jharkhand to Reliance Power Ltd.

“When PFC was given this new role, the power ministry was aware that the agency didn’t have the expertise so a consultant was brought in. As E&Y didn’t give sound advice, action was taken (against it),” the PFC executive added.

CAG also censured the government for the way it dealt, in 2007, with the consortium, as reported by Mint on 16 November. “Instead of forfeiting the bid bond of Rs. 120 crore furnished by the bidder, a token penalty of Rs. 1 crore was levied on the bidder.” Following the disqualification of Lanco and Globeleq, the project was awarded to Reliance Power.

The report of the government’s auditor, which is a follow-up to an earlier review of the SPVs (companies set up for a specific purpose; in this case, the development of a power plant) of PFC, was very critical of the appointment of E&Y, especially in the manner in which a rival consulting firm, Icra Ltd, was rejected. “The spirit of competition was undermined in the appointment of bid process management consultant for two SPVs (Sasan Power Ltd and Coastal Gujarat Power Ltd) resulting in extra expenditure of Rs. 1.56 crore.”

It also added: “As Icra had met the requisite qualification criteria as notified in the bidding documents and was found technically qualified,” its rejection was “not convincing”.

An Icra spokesperson declined comment.

The power ministry started examining the bidding for the Sasan power project after India’s Central Vigilance Commission (CVC), a body that looks into the functioning of government departments and agencies, raised questions about the process.

Mint reported on 18 March 2008 about CVC’s examination of Lanco’s bid and its direction to the government “to review the role played by consultant (E&Y), various committees and the board of SPL”, referring to Sasan Power, the SPV created by PFC for the project.

An official at CAG, who is directly involved in the audit process, said on condition of anonymity: “The very basis of the award of the contract (to Lanco-Globeleq consortium) after the preliminary audit seems to be flawed. It appears that the private consultant has failed to fulfil its obligations.”