The ‘Yahapalana method’ of doing things: Crooked machinations in Rs. 60 billion coal tender

By C. A. Chandraprema-August 28, 2016

It was only since last year that people have gradually become aware that the supply of coal to the Norochcholai power plant is by far the country’s biggest single tender worth more than Rs. 60 billion for a three years’ supply of 6.75 million metric tonnes. On 18 June 2014, a tender was floated to procure three years’ supply of coal. The price of coal fluctuates and in order to ensure a constant supply at a fixed price the government adopted the practice of giving out three-year supply contracts. The tender procedures took several months and by that time, a new government was in power. The new government seemed determined that the tender should go to a new party and not to the company that had been the main supplier of coal since the inception of the Norochcholai power plant.

The contention of the new government was that one company had been supplying coal since the Norochcholai plant began operations and that Nobel Resources Ltd had somehow been bagging the contract every time. Needless to say this huge contract gave rise to a great deal of competition between the bidders, each leaving no stone unturned, no appeal unmade, no court unmoved, in order to win the contract. From the first tender onwards, Nobel Resources had emerged as the most successful competitor being able to bag the contract even if it did not win in the first round by putting in appeals and pleading its case in every available forum. Even with regard to the tender floated on 18 June 2014, despite an unprincipled effort by the yahapalana government to award the tender to another company, Nobel Resources appealed successfully to the Procurements Appeal Board saying that the rival company Swiss Singapore Ltd had been given the contract after altering the bidding criteria.

The Procurements Appeal Board recommended the cancellation of the tender and calling for fresh bids. However, the new government brought a cabinet paper to override the recommendation of the Procurements Appeals Board and to award the tender to Swiss Singapore Ltd. The cabinet paper recommended that a long term contract for the supply of 4.5 million metric tonnes be awarded to Swiss Singapore Ltd at USD 68.72 per metric tonne and for the procurement of 2.25 million metric tonnes of coal on the spot tender procedure through the Standing Cabinet Appointed Procurement Committee. Nobel Resources Ltd filed a fundamental rights case against the Minister of Power and Renewable energy and the whole Cabinet saying among other things that cabinet bad been misled into approving the cabinet paper at issue.

Noble Resources International Pte Limited v Minister of Power and Renewable Energy et al, became a landmark case because the Supreme Court heard it as a matter of national interest despite arguments by the Minister of Power and Renewable Energy and other respondents that the Petitioner did not have the locus standi to invoke the jurisdiction of the court because it was a foreign company acting on its own without a local agent.

Chief Justice K. Sripavan stated that the court had decided to go into the merits of the case as some of the events that took place in the award of this tender ‘shocks the conscience of the Court’. Nobel Resources had said in their petition to the Supreme Court that the tender criteria had been altered after the bids had been opened.

First the cudgel

The bidding criteria were changed after the bids had been opened not under the Rajapaksa government but under the present government that came into power promising good governance. Hence what had ‘shocked the conscience’ of the Supreme Court was not crookedness of the previous government but that of the present one. The supreme court observed that the Standing Cabinet Appointed Procurements Committee had received a letter dated 29.06.2015 from Swiss Singapore Ltd and a meeting of SCAPC was convened on the same day and they directed the Technical Evaluation Committee to re-evaluate the Bids ignoring two steps of the Evaluation Procedure. The lower granular size limit was among the two criteria removed from the bidding documents so that more powdery coal would be accepted. Swiss Singapore Ltd was thereupon awarded the tender by the SCAPC.

The Supreme Court observed that ‘no one, neither the State nor the SCAPC shall act contrary to the bid documents and the Government Procurement Guidelines’ and stated that the Standing Cabinet Appointed Procurements Committee should have rejected the bid of Swiss Singapore Ltd for influencing the tender procedure. The SC stated very clearly that ‘the decision made by the SCAPC was outside its jurisdiction and therefore null and void’ and further that the decision taken by the Cabinet of Ministers on 22 September 2015 to award the contract to Messrs Swiss Singapore Ltd ‘could not be considered a valid decision’. One would think that after an unequivocal statement from the Supreme Court like that, the government would back down and cancel the tender and call for fresh bids. But, what the government did was exactly the opposite. It tried to justify before the public the retention of Swiss Singapore Ltd as the coal supplier.

The first step in this was for the Minister of Power of Renewable energy to appoint a Committee to look into the question whether the government has suffered any monetary loss due to the way coal was purchased after the present government came into power. The committee was appointed on 12 July 2016 and comprised of K. K.Y. W. Perera, Lakshman R.Watawala and Janaka B. Ekanayaka. The committee observed that during 2015, there had been two kinds of coal procurement - main long term bulk tender and spot tenders for immediate procurements as per the cabinet decision mentioned earlier. On this basis, 1,126,805 tonnes of coal had been bought on four spot tenders after the cabinet decision up to 5 April 2016 at a cost of USD 56,075,563. Under the long term tender, 1,064,724 tonnes of coal had been purchased for USD 57,932,356. The average cost of coal was USD 49.76 under spot tenders. While it was 54.41 under the long term tender.

The Perera committee decided that there had been a total gain of 7.6 million USD from spot tenders as against the long term tender. The report observes that spot prices depended on day-to-day market conditions and that in 2016 there had been a slight upward trend in coal prices and that there should be a balance between the spot purchases and long term supply. The Perera committee report observes that the original price quoted by Swiss Singapore Ltd was USD 68.72. Later it was decided to change two of the bidding criteria. The index used was changed from the Australian index to the South African index and it was decided not to consider the grain size when purchasing the coal. After further negotiations with Swiss Singapore on the basis of the changed criteria, the price was reduced to USD 58. All other criteria such as the ash content, the moisture content, volatile matter and sulphur content were the same.

Noble Resources had quoted for coal with the particle size below 2 mm being 10% or less while Swiss Singapore had put in bids to supply coal where the grains below 2mm was as high as 25%. The Perera committee observed that the ash content, moisture content, volatile matter and sulphur content had a bearing on the operation of the coal power plant, but the size of the granules had only a minor role to play in plant efficiency. If the size of the coal is too large a separate crusher had to be used to crush the coal. However, if coal particles were too small below 2mm, it behaved like dust. When stocked in the coal yard this coal would blow away with the wind and settle on nearby houses and trees. The probability of self ignition in storage increases in the case of the smaller particles. The Perera committee itself recommended that the powdery coal dust had an environmental impact which was ‘not quantifiable’ and that the amount of fine particles in the coal supplies had to be controlled. By making this recommendation, the Perera committee was in fact saying indirectly that the step that the yahapalana government took to disregard the granular size of the coal in order to award the contract to Swiss Singapore Ltd was wrong.

Then sweet talk

The Perera committee observed that the quality of each coal shipment differs and that Swiss Singapore had delivered 18 coal shipments after the removal of the penalties for granular size and the amounts actually paid after negotiation had been different to the originally agreed amounts. In the case of nine shipments the amount actually paid had been less than the original amounts and in the case of the remaining nine, it had been more than the originally tendered amounts. After balancing out the losses against the gains, they had calculated that a sum of USD 287,029 had been gained by the Sri Lankan government. The problem is that this study on coal procurement carried out in 2015 and 2016 to determine whether there was ‘loss or damage’ to the government has not dealt with the most essential question.

This whole controversy arose in the first place, because the coal tender had been awarded to Swiss Singapore Ltd after changing the bidding criteria so as to accept the more powdery coal. One of the contentions that Nobel Resources made in their petition to the Supreme Court was that serious environmental damage would result from importing the more powdery coal – a point that the Perera Committee has also accepted as we saw earlier. Yet the Perera committee has argued perhaps tautologically that the government had saved USD 287,029 (around Rs. 42 million) in monetary terms by buying cheaper, lower quality coal from Swiss Singapore Ltd. The question that we have to ask ourselves is whether a paltry benefit of Rs. 42 million is adequate compensation for the environmental damage caused. It is worthy to note that the committee itself has recommended that the government should have suitable criteria regarding the granular size of the coal in future tenders. It should be borne in mind that the contract awarded to Swiss Singapore Ltd was for three years during which lower quality coal would continue to be imported.

The very terms of reference given to the Perera committee were loaded in such a way that the yahapalana government would get the conclusion they wanted from it. According to minister Ranjith Siyambalapitiya’s letter to Prof. K. K. Y. W. Perera inviting him to chair the committee, the only matter they were asked to look into was whether the government had suffered any monetary loss due to the way coal was purchased after the present government came into power. After thus appointing a committee to state the obvious that there was a monetary saving by buying cheaper, lower quality coal, and thus trying to convince the public that there was nothing wrong with the manner the new government procured coal, the government is now trying to devise ways and means of keeping Swiss Singapore Ltd as the main supplier of coal despite the Supreme Court ruling.

Bending the law

The Minister of Power and Renewable Energy has written to the Attorney General requesting advice on how the Supreme Court decision should be implemented. The Attorney General’s Department has written back that while dismissing the application made by Noble Resources Ltd, the Supreme Court has observed that there were ‘flaws’ in the decision to award the tender to Swiss Singapore Ltd. The SC had stated that the court had no alternative but to declare the decision to award the tender to Swiss Singapore was ‘invalid in the eye of the law’ and that the decision of the Standing Cabinet Appointed Procurement Committee in that regard was outside its jurisdiction and, therefore, ‘null and void for all purposes’. Furthermore, the SC had said that the decision taken by the Cabinet to award the contract to Swiss Singapore Ltd ‘cannot be considered a valid decision’.

Despite these observations, the AG stated that the SC did not make any order to cancel the agreement entered into with Swiss Singapore Ltd. The AG has covered himself by saying that in view of the adverse comments made by the SC ‘it may be appropriate’ to terminate the agreement with Swiss Singapore after giving adequate notice in terms of that agreement. But in the same breath the AG says that any move to abrogate the agreement without a court order could result in arbitration proceedings, and claims for damages. The AG has advised the Minister of Power and Renewable energy that he should apprise the cabinet of the options available and the possible repercussions of terminating the tender and to decide whether the tender should be cancelled after giving adequate notice or whether fresh tenders should be called after the contract with Swiss Singapore expires in April 2017.

Finally, the AG has advised that if a decision is made to terminate the contract that it should be arrived at after a discussion with Swiss Singapore Ltd to avoid costly arbitration proceedings. The funny thing here is that this case was filed in the Supreme Court by Noble Resources Ltd, against the Minister of Power and Renewable Energy saying among other things that he had misled Cabinet into awarding the contract to Swiss Singapore Ltd and the AG defended the Minister of Power and Energy in that case. The SC gave leave to proceed in this case only because they determined that there was a matter of public interest involved and they deliberately refrained from dismissing it on the grounds of the lack of locus standi of the petitioner to file such a case.

Though they dismissed the case, in the course of the judgement, the SC held among other things that the tender had been improperly awarded to Swiss Singapore Ltd which in fact was also the contention of the petitioner. Now the main respondent in that case obtains advice from the AG who defended him in court about how to work around the SC ruling! On top of it all the main respondent also appoints a Committee of experts asking them a tautological question whether the government received a monetary benefit when the tender criteria was lowered and cheaper coal obtained! The idea seems to be to retain the coal supplier selected by the yahapalana government by hook or by crook. By observing the moves made by the government in relation to the coal tender a clearly identifiable way of doing things becomes apparent, which this government has applied not only to the coal tender but to other matters as well.