CHAPTER 2
MINISTRY OF CHEMICALS AND PETROCHEMICALS

Indian Petrochemicals Corporation Limited

Indian Petrochemicals Corporation Limited (IPCL) invited (June 1997) limited tenders to procure 18.75 MT of ‘PEPQ’ (antioxidant) for use in its Vadodara Plant. Out of the two offers received, the offer of M/s. GE Plastics India Limited, a unit of Specialty Chemical Division of General Electric Plastics, Netherlands (GEP) was lower (L1) at the landed cost of Rs. 7.91 lakh per MT as compared to the offer of M/s. Hindustan Ciba Geigy (regular supplier) of Rs. 13.82 lakh per MT (L2). IPCL placed an order (July 1997) for 12.75 MT on M/s. Hindustan Ciba Geigy and decided to reserve 6 MT for ordering on GEP, subject to suitability of the material to be tested. In November 1997, IPCL invited one more tender for procurement of 22 MT of chemical, against which both the firms again quoted the same rates of June 1997. No document was on record to indicate that the GEP was ever asked to submit the samples for test. Since IPCL had not received the sample against the first order from GEP and tested its suitability, the second order was also placed (January 1998) on M/s. Hindustan Ciba Geigy at an additional cost of Rs. 1.30 crore as compared to the rates of GEP.

The Management could obtain the sample from GEP only in January 1998 (though the decision was taken in July 1997) and its test suitability was established in February 1998. Accordingly, purchase order for the reserved quantity of 6 MT of chemical was placed on GEP in April 1998. Thus the delay in obtaining the sample and establish its suitability resulted in procurement of chemical at a higher rate by incurring an extra expenditure of Rs. 1.30 crore.

On this being pointed out in Audit, the Management stated (June/August 2000) that the orders could not be placed on GEP as it had submitted the sample very late. Therefore, the requirement of material was met by placing the purchase order on M/s. Hindustan Ciba Geigy again, being proven and established vendor. Further, the process of establishing reliable and qualitative source of supply was expected to take time.

The reply of the Management is not tenable in view of the fact that there was nothing on record to show that the Company took up the matter with the lowest quoted party to get the sample tested at the earliest so as to avail of the lower price benefit. Besides, the system of placing trial order for new product generally followed by IPCL in similar cases was also not followed in the instant case.

The Ministry stated (March 2001) that ‘PEPQ’ had direct effect on the quality of the finished products and the particular supplier was already approved for this new plant, as such the Company had to weigh all the factors before switching over to the new suppliers. The Ministry, however, admitted that in view of the price gap of about Rs. 6.00 lakh per MT in the material of the two suppliers, IPCL could perhaps have shown some urgency in testing the material offered by GEP.

2.1.2    Infructuous expenditure on the purchase of heat exchanger

High Density Poly Ethylene (HDPE)/Low Linear Density Poly Ethylene (LLDPE) plant in Maharashtra Gas Cracker Complex, Nagothane of IPCL comprises Train I and II, each of which contains upstream and down stream coolers. The down stream coolers installed in both the trains were found (November 1993) to be in an unhealthy conditions due to thinning of their tubes and occasional leakage. In order to replace these coolers, the Management decided to procure two heat exchangers one for each Train and an order for one heat exchanger was placed (September 1994) on M/s. Godrej & Boyce Limited (Godrej). The heat exchanger received in February 1996 was installed on Train II in May 1997 during the normal shut down of Gas Cracker Plant.

Meanwhile in June 1995, IPCL approved an expansion scheme for LLDPE wherein downstream heat exchanger of higher capacity and of modified version was to be installed in Train I. Despite this fact on record, IPCL proceeded ahead to procure one conventional down stream heat exchanger for Train I and placed an order on M/s. Mistry Prabhudas Manji Engineering Private Limited, Mumbai (MPM) on 26 December 1995 at a cost of Rs.74.61 lakh. The downstream heat exchanger was to be supplied by August 1996 but was actually supplied in September 1998 (i.e. after over a period of two years of the scheduled delivery date). The main reason for this abnormal delay was that the firm was financially unsound. Considering the financial difficulties of the MPM, IPCL in violation of the terms of purchase order paid (March 1997) an interest free advance of Rs. 23.20 lakh. The advance was paid with a specific condition that the delivery would be made by April 1997 failing which the order was to be cancelled and the advance refunded along with interest at the rate of 24 per cent. Despite this, MPM failed to adhere the delivery schedule and IPCL neither cancelled the order nor recovered the advance with interest as stipulated.

Meanwhile in line with the proposed expansion plan, IPCL placed another order for the supply of higher capacity downstream heat exchanger on M/s. Samsung Engineering Company Limited (Samsung) on 17 January 1997 for the same Train I. A committee of officers of IPCL while reviewing the progress made in the order placed earlier with MPM observed on 18 March 1997 that the down stream cooler of a larger capacity under proposed expansion scheme was scheduled to be installed by Samsung in the first quarter of 1998 and therefore, replacement of down stream cooler with one supplied by MPM in Train I after April 1997 shutdown and before first quarter of 1998 would hardly serve any purpose. Subsequently, another committee of officers in their report of 10 December 1997 further reiterated that there was no possibility of a shutdown before April 1998 to replace the exchanger fabricated by MPM. The newly fabricated exchanger by MPM would, therefore, become redundant and its cost would be infructuous and the committee proposed that the exchanger might not be accepted and necessary action be initiated for the recovery of the advance paid to the firm.

The heat exchanger supplied by Samsung was installed in Train I in May 1998. Instead of cancelling the order on MPM, IPCL decided in April 1998 to convert the down stream heat exchanger ordered on MPM into up stream with suitable modifications and keep it as insurance spare. The heat exchanger subsequently supplied by MPM in September 1998 at a cost of Rs. 69.49 lakh was lying idle (May 2001).

The Management replied (February 2001) that the performance of both the downstream gas coolers deteriorated at a faster rate, resulting in heavy production loss. To improve productivity in future, the second downstream gas cooler was ordered in December 1995 but MPM could not complete the order by due date. Subsequently it was decided that if the exchanger was ready by April 1997 it could be gainfully utilised till the installation of new exchanger by Samsung. However, the MPM could not meet this delivery schedule also. In view of this it was decided to have it as insurance spare to install as upstream cooler after carrying out few modifications whenever required.

The Management further added (May 2001) that in view of delay in delivery by MPM the options left with them were either to cancel the order and initiate legal action to recover the advance paid or to explore the possibilities of utilising the exchanger being a tailor made long delivery item. Both these options were deliberated and option regarding cancellation of order was ruled out since the litigation would have been time consuming and may not lead to IPCL’s advantage. Regarding recovering of liquidated damages for the delay in supply the Management stated that the damages recoverable worked out to Rs. 5.80 lakh and against this Rs. 6.95 lakh had been recovered by way of cost of modification for converting the heat exchanger to upstream cooler. Therefore it was decided not to levy any further charges against the firm.

The replies of the Management are not tenable on the grounds that with the installation of the two downstream coolers by Godrej and Samsung, two old heat exchangers were available which could have been reused by re-tubing them with filter tubes. The breach of contract by not supplying the exchanger as per the agreed terms was committed by MPM as such the apprehension of the Management that the litigation may not led to IPCL’s advantages was not based on any sound logic. Thus, decision of the Management to accept it, as insurance spare was a fait accompli and after thought. Further had the heat exchanger been supplied by MPM by delivery date of August 1996, the loss of production as stated by the Management could have been avoided for the period from May 1997 to May 1998 (date of installation of exchanger by Samsung).

The matter was referred to the Ministry in March 2001; their reply was awaited (October 2001).

IPCL entered into an agreement with M/s. Dodsal Limited (DL) on 8 December 1995 for laying and operating of Dehaj - Gandhar - Baroda pipelines on build, own, operate and transfer basis. The pipelines numbering three were intended for product transfer of Ethylene, Propylene and Naphtha. The minimum guaranteed offtake (MGO) for product transfer was fixed at 240000 MT per annum (i.e. 20000 MT per month). For this purpose, Clause 5 (b) (3) of the agreement stated that the first year of operation would start from the first day of the month following the date of commissioning and subsequent years shall start from its anniversary.

The pipeline for product transfer of Propylene was commissioned on 23 May 1997 and 526 MT of Propylene was transferred between 23 May 1997 and 31 May 1997. For the purpose of calculation of compensation, the month was reckoned from 23 May 1997 to 22 June 1997. This principle was applied further from 23 June 1997 till 22 March 1998 and payments for 20000 MT being MGO per month were made by IPCL to DL. In addition, Rs. 74.10 lakh was paid by IPCL for pro rata MGO of 6000 MT for remaining 9 days from 23 March 1998 to 31 March 1998. Thereafter the payment was made on the basis of calendar months.

In terms of the agreement the payment on the basis of MGO was to commence from 1 June 1997 onwards and not from 23 May 1997. For the initial product transfer of 526 MT Propylene between 23 May 1997 and 31 May 1997, IPCL was to pay Rs. 6.50 lakh (Rs.1235 per MT) only, whereas it paid Rs. 74.10 lakh. This resulted in undue financial benefit to the firm to the tune of Rs. 67.60 lakh.

The Management admitted (April 2001) that there was no ambiguity in clause 5(b) (3) of the agreement for the purpose of monthly MGO rate. DL should have raised separate bill for the period from 23 May 1997 (date of commissioning) till the end of month and the calculation of the minimum offtake of 240000 MT per year start from the month following the date of commissioning i.e. 1 June 1997. DL, however, preferred to raise monthly bill linked to the date of commissioning i.e. 23 May 1997 for the monthly MGO or actual whichever was higher. The Company did not object, as the same was not considered disadvantageous with reference to the contractual obligations accepted under the contract.

The Ministry further added (July 2001) that IPCL had to make payment for 9 days of May 1997 also as per the MGO clause which came to 6000 MTs (prorated MGO). Accordingly, the payment amounting to Rs. 74.10 lakh was made to DL since the period from 23 May 1997 to 31 May 1997 was also a part of the contract of 15 years which would expire on 22 May 2012.

The replies of the Ministry and the Management are not tenable as there was no contractual obligation to pay on the basis of MGO for the period from 23 May 1997 to 31 May 1997 in terms of clause 5 (b) (3) of the contract and the payment should have been restricted to actual quantity transferred.