CHAPTER 10
DEPARTMENT OF FERTILIZERS

Madras Fertilizers Limited

10.1.1    Award of contract to an ineligible party

The Company had to pay demurrage of Rs.78.23 lakh due to appointment of an ineligible bidder as clearing and forwarding agent for handling bulk cargo.

Madras Fertilizers Limited (Company) took on loan about 20000 MT of imported urea from Department of Fertilizers (DOF) to supplement captive consumption. The cargo was received (July 1999) at Chennai Port initially by Indian Potash Limited (IPL) on behalf of the DOF. The Company in turn received the cargo on ex-wharf basis from IPL as instructed by DOF. The Company entrusted the work of receiving the bulk Urea on ex-wharf basis and subsequent transportation to its clearing and forwarding (C&F) agent, M/s. Seashore Logistics Private Limited, Chennai (SSL).

It was seen that the profile of bidders prepared by the Company before selection of C&F agent distinctly mentioned that SSL had no previous experience in handling bulk cargo at Chennai Port and no proof of experience was provided for handling bulk cargo anywhere. On arrival of the ship SSL failed to mobilise in time (a) adequate number of trucks (b) adequate labour and (c) adequate funds to handle the shipment. This in turn caused abnormal delay in discharging the cargo from the vessel. In order to hasten discharge of the product, the Company allowed SSL to temporarily dump approximately 3000 MT of the cargo in a transit shed inside the port area. As the cargo remained for nearly three months in the transit shed, IPL as the ‘receiver’ of the cargo was levied a demurrage of Rs.78.23 lakh. The Company subsequently paid demurrage charges to IPL, as the material was taken on loan from DOF on ex-wharf basis. The Company terminated the C&F contract (October 1999) to avoid further loss. Thereafter, the Company incurred further handling and storage charges of Rs.9.45 lakh on the stocks left over by SSL at the termination of the contract for which another C&F agent was engaged.

The following irregularities were committed by the Company to favour SSL at the time of awarding the contract:

1. The Chairman and Managing Director of the Company approved (February 1998) limited tender enquiries to be sent to 12 firms already registered with the company. SSL was not one among the twelve. Subsequently, a separate tender enquiry was sent to SSL who was referred by DOF.
2. As per tender conditions, the bidder should have possessed C&F agent licence to handle the bulk fertilizer cargo at the Port of Chennai. But the Stevedoring Licence and the Customs House Agent Licence produced by SSL at the time of bidding was not in their name but in names of other parties, thereby disqualifying them from being considered. Still the condition was relaxed by MFL and the contract was awarded to SSL. So far as the condition relating to past experience was concerned, while the bid submitted by one M/s. Continental Transport Agencies was rejected because it was not meeting the tender norms pertaining to experience, the offer of SSL was found acceptable by the Company and contract was awarded to it despite inexperience in handling bulk cargo, this established the undue favour to SSL in preference to bidders with past experience.

The Company admitted (July 2002) that SSL was awarded the contract, which did not even possess Customs House Licence. The Company, however, contended that it was in need of a new agent to encourage competition. Ministry stated (October 2002) that there was no documentary evidence to show that SSL was referred to by it.

The argument on the need to experiment with a new C&F agent is not tenable because even a new agent should have fulfilied the norms for selection specified by the Company, which in this case were ignored. Moreover, floating limited tender enquiry to the empanelled C&F agent instead of open tender cannot be stated to be an action to increase competition. Though, the Company’s records expressely stated that SSL was referred to by DOF but it did not elaborate upon the mode of communication. Ministry while stressing on the absence of documentary evidence did not effectively counter the Audit observation.

Thus, appointment of an ineligible party as C&F agent by the Company clearly indicate the favour bestowed on the party, which resulted in an avoidable loss of Rs.78.23 lakh. The case has a vigilance angle also in view of the extraordinary way in which the SSL was selected.

National Fertilizers Limited

10.2.1    Avoidable expenditure in purchase of bags

In July 1999, National Fertilizers limited (Company) assessed its requirement of 417 lakh HDPE (High density poly ethylene)/Jute bags for 6 months for packing fertilizers produced by its 5 plants, involving an expenditure of about Rs.38.50 crore. Since the packing material is a vital input required for making uninterrupted despatches, the Company decided to place orders (between August 1999 and October 2000) on multiple suppliers since the lowest tenderer (L1) was not in a position to meet its entire requirement.

In line with CVC (Central Vigilance Commission) guidelines (November 1998) which forbid negotiations with the parties other than lowest tenderer, the Company had a policy of distributing the supply orders amongst the tenderers according to the ranking made in comparative statement at different rates quoted by them without any price negotiations. However, CVC subsequently clarified (March 1999) that in cases when the quantity to be ordered was much more than what the L1 alone could supply, the quantity order might be distributed in such manner that the purchase was done in a fair, transparent and equitable manner.

It was noted that the Company continued the old practice of placing orders at differential rates quoted by the firms even after issue of the CVC clarification. This was also not commercially prudent as it resulted in placement of orders for the same items at the same time at different rates. Even when two members of the Tender Committee recommended (February 2000) that all the suppliers be asked to match their rates with that of the lowest bidder, the Company failed to negotiate prices with other tenderers and purchased 981 lakh bags on three occasions at the weighted average price of Rs.9.03, Rs.9.89 and Rs.10.72 as against the lowest price of Rs.8.88, Rs.8.68 and Rs.10.48 per bag between August 1999 and October 2000.

Eventually in October 2000, the Board of Directors asked the Tender Committee to make a counter offer to all the suppliers to match the lowest price. Six bidders agreed to supply the bags at the lowest rate and the quoted weighted average price of Rs.8.93 per bag came down to Rs.8.74 per bag in January 2001 and further to Rs.8.45 in September 2001. The Company’s failure to follow the system of counter offer to match the lowest price earlier resulted in extra expenditure of Rs.2.82 crore on purchase of 981 lakh bags during August 1999 to October 2000.

Management stated (July 2002) that irrespective of the fact whether the prices were negotiated or not, the price reasonability, keeping in view the specification, was always ensured.

The reply of Management is not tenable as payment of rates higher than the lowest rates to different suppliers for the same item was not commercially prudent and resulted in extra expenditure. Besides after the clarification of CVC in particular, the action of the Company was not at all justified. The change in the policy subsequently resulted in the savings of Rs.70.75 lakh in the purchase of 366 lakh bags in respect of tender finalised in January 2001.

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

10.2.2    Blockade of funds in idle assets and consequent interest loss

The Board of Directors authorised (January 1991) Managing Director of the Company to explore the possibility of buying a suitable office premises at Bhopal from State Government Authorities. The Company firmed up (January 1991) with Madhya Pradesh Housing Board (MPHB) for acquisition of two separate premises comprising 9909 square feet (Paryawas Bhawan) and 9707 square feet (Gautam Nagar) at Bhopal. While according approval to the acquisition of the premises, the Board of Directors considered (February 1992) that premises at Gautam Nagar would be used for Marketing Division and after taking over Paryawas Bhawan, the Marketing Division would be shifted to the Paryawas Bhawan and premises at Gautam Nagar would either be used for forthcoming Vijaypur Expansion Project or it could be disposed of. This indicated that there was no firm requirement for the two premises.

The possession of Gautam Nagar accommodation taken in June 1991 at a cost of Rs.50.85 lakh was being used for Marketing Division. However, due to litigation between the MPHB and its sub contractor, the possession of Paryawas Bhawan was delayed and actually taken in December 1999 at a cost of Rs.93.31 lakh (Rs.78.47 lakh as cost of premises, Rs.7.15 lakh towards registration charges & stamp duties and Rs.7.69 lakh towards incidential expenditure till March 2002). The purchase cost of Paryawas Bhawan was partly met by availing cash credit of Rs.75.27 lakh (Initial payment of Rs.7.50 lakh was made in January 1991 and Rs.75.27 lakh was paid progessively up to March 1993)on which an interest of Rs.1.20 crore had been incurred by the Company until December 2001.

Since, the premises at Paryawas Bhawan was acquired without visualising its utility, the property was found surplus even before the Company took possession. Further, the expectations of Management for likely requirement of the space for Vijaypur Expansion did not prove correct, hence, the requirement of the property became redundant. Efforts of the Company in exploring possibility of either to dispose of or rent out the premises through press advertisements had not yielded any results so far (July 2002).

Management in its reply stated (March/August 2002) that purchase of accommodation at Paryawas Bhawan was needed at that time (January 1991) but in view of changed circumstances the building could not be utilised for Vijaypur Expansion Project.

Ministry also endorsed (August 2002) the views of Management. The reply of Management/Ministry is not tenable as it hides the fact that ab initio the requirement of two premises of such area was not correctly analysed by the Company before conclusion of the deal. Even at that time the Company reckoned that the premises might be required to be disposed of, if considered necessary. As such, the marketability of the premises should have been assessed prior to purchase. It was a case of bad planning.

Rashtriya Chemicals and Fertilizers Limited

10.3.1    Wasteful investment of Rs.44.91 crore on Formic Acid Plant

Formic Acid is used in leather, rubber, chemical and textile industries. Rashtriya Chemicals and Fertilizers Limited (Company) decided in May 1995 to set up a 10000 Metric Tonnes per annum (MTPA) Formic Acid Plant at an estimated cost of Rs.32.32 crore, as:

1. the Company was manufacturing Methanol and Carbon Monoxide, major raw materials required for production of Formic Acid;
2. a market survey in 1994 had assessed the demand supply gap in the country for the product to go up to 8000 MTPA by 1998-99; and
3. a detailed feasibility report (DFR) prepared in February 1995 had envisaged break-even at 55.81 per cent capacity utilisation and a payback period of 6.05 years on an assumed sales realisation of Rs.23000 per MT and average cost of production of Rs.17255 per MT.

A firm quotation was obtained through global tender from Acid Amine Technologists (AAT), USA, who had put up similar plants elsewhere, for licence, process know- how and basic engineering. Agreement for basic design, technical assistance and supervision of erection, start-up and commissioning was entered into with AAT for US$ 0.85 million (Rs.3.76 crore) in July 1995 with a time frame of 24 months for commissioning of the Plant.

The Plant was commissioned in September 1998 at a total cost of Rs.44.91 crore. Commercial production started in December 1998, but the Plant could run only intermittently due to repeated breakdowns. Although these were subsequently resolved, the Plant could not run on full load due to certain process problems such as low conversion of Methyl Formate to Formic Acid, high catalyst consumption. AAT did not also demonstrate the guarantee test run as per agreement and Company recovered Rs.33 lakh in December 1999 invoking bank guarantee given by them. A test check of records revealed that at the time of preparation of DFR, the Company did not possess sufficient data regarding prices for open architecture system, since the Company was procuring this for the first time.

The Company could produce only 1392 MT of Formic Acid between December 1998 and June 2000. It suspended production thereafter because of (i) high cost of production; (ii) lack of demand for the product as growth projected in the market study did not materialise; (iii) excess production capacity in the country due to setting up of new plants/ enhancement of capacity by competitors; and (iv) unremunerative market price. A committee, which reviewed the viability of the Plant, recommended (November 2000) discontinuation of production as it was economically unviable.

Management stated (June 2002) that:

1. While deliberating the viability of setting up this Plant, the market survey report on demand supply, availability of technology, capability of the technology suppliers, etc. were considered and the decision to set up the Plant was justified at that time.
2. The Plant could not be operated currently due to:
   1. acute shortage of gas, the basic input and consequent increase in cost of steam on use of alternate fuel viz. Naphtha;
   2. lack of demand because of the main users viz. rubber industry itself being in crisis, general slowdown of economic activities and import liberalisation;
   3. cheaper imports because of steep reduction in custom duty during last four to five years; and
   4. inability of the technology supplier to prove the guarantees inspite of their earlier good track record.

While endorsing the views of Management, Ministry stated (August 2002) that the plant was not in operation due to restricted availability of basic input i.e. natural gas, high cost of production and low selling prices which do not cover even the variable cost.

The reply of Management/Ministry is not tenable as:

1. the demand supply gap in 1994-95 was only 1470 MT and the projected gap by 1998-99 as per the market survey, which in itself was over optimistic, was only 8100 MT. This did not justify setting up a 10000 MT Plant;
2. probability of competition from new entrants was also not considered in the market survey;
3. adverse impact of liberalisation of economy and custom duty reduction were known factors in 1995 when the project was taken up;
4. allocation of gas for use in boilers for generation of steam was only a fallback option as shortage of gas had been known to the Company from 1992-93 onwards, that is, well before commencement of the project; and
5. although the technology supplier, AAT, had acquired the patent and licence for setting up Formic Acid Plants in 1986, they had no proven track record at the time of their selection by the Company in 1995.

Thus, setting up a Formic Acid Plant based on unrealistic assessment of market demand and poor implementation of the project, leading to process defects and high cost of production rendered operation of the Plant economically unviable and the investment of Rs.44.91 crore thereon was rendered wasteful.