Ministry of Steel
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Report No. 11 of 2018 CHAPTER XII: MINISTRY OF STEEL Steel Authority of India Limited 12.1 Import, Shipping and Transportation of Coal 12.1.1 Introduction Steel Authority of India Limited (SAIL or Company) manufactures steel products and requires about 15 MMT (Million Metric Ton) coking coal annually, of which 12-13 MMT is imported. Coking coal is imported either through global tenders or through Long Term agreements (LTAs). The Company’s Coal Import Group (CIG) is responsible for import of coal. The CIG assists the Empowered Joint Committee (comprising SAIL and RINL) and SAIL Directors Committee (SDC) to take import related decisions. The Transport and Shipping Department (TSD) of the Company is responsible for chartering of vessels for overseas transport of imported coal and limestone, port handling and dispatches of imported cargo from ports located at Visakhapatnam, Gangavaram, Paradip, Dhamra and Haldia to respective steel plants. Value of its annual coal imports ranged between `6937 crore to `11,656 crore during 2013-14 to 2016-17 which was 15 to 22 per cent (approx) of the Company’s total expenditure annually. The audit objective was to assess whether import of coking coal and its shipping, handling and transport to the steel plants were managed in a transparent, competitive and fair manner ensuring efficiency and economy. SAIL imported 51.10 MMT of coking coal valuing `37,254 crore during 2013-17. Audit reviewed records relating to import of 38.79 MMT of coal valuing `25,598 crore at Coal Import Group of SAIL. All eight long term agreements for import of coal entered into by SAIL during 2013-16 were covered during the audit. Audit examined the entire activity relating to import of cargo and dispatches to steel plants through records kept at Transport & Shipping Headquarter of SAIL, Kolkata and its five Branch Transport and Shipping Offices (BTSOs) located at Visakhapatnam, Paradip, Haldia, Kolkata and Dhamra. During this period (2013-17), 670 vessels were chartered / handled by the TSD for import of 53.08 MMT of coal and limestone at a logistic cost of `12,797.07 crore. Audit examined chartering of 511 vessels by TSD for import of 40.93 MMT coal and limestone at total logistic cost of `9633.40 crore. All handling contracts related to coal and limestone awarded during the same period were also examined by the audit. 12.1.2 Audit findings 12.1.2.1 Import of Coal A. Vendor base for import of coal not augmented The Company’s policy on coal import is to procure the bulk of its imports through long term agreement (LTA). LTAs are entered into with suppliers in the vendor base of the Company. A large vendor base increases competition and leads to more competitive prices 145 Report No. 11 of 2018 for the Company. Clause 5 of the Policy for Import of coal of the Company stipulates that the supplier base be broadened by open, global, invitation for Expression of Interest (EOI) throughout the year. The EOIs that are accepted technically are tested before a new vendor is added. Audit noted that the Company failed to develop any new vendor during 2010-17, and only one vendor was added in 2017-18. It was seen that the Company had not framed any time frame for evaluation of EOIs, Pilot Oven Testing and Industrial trial run. Out of 21 responses received against 4 EOIs issued during 2013-17, the Management failed to complete technical evaluation for two, though these EOIs had been issued as early as June-July 2015. Only three responses were found to be technically compliant. Audit noticed that one of these have been finalised in 2017-18 and there were considerable delays in the process as indicated below: • One bid was identified as technically compliant in December 2013. The pilot oven tests were completed in August 2014 and the case was abandoned in May 2015 as the vendor and company were fighting in the court in another case. • Another bid was found technically compliant in December 2015 and pilot tests were completed in April 2016. The Management decided (June 2016) to conduct industrial trial which has not yet materialised (June 2017). The Management stated (June 2017) that they are making all efforts to increase the vendor base and that time taken in processing the EOI was based on completeness of the bid. The Management also stated that the bidders were to be intimated regarding acceptability or otherwise of their bid within six months of receipt of the bid. The reply of the Management is not acceptable as the vendor base remained virtually static over the last seven years and considerable delays in processing of EOIs issued during 2013-17 were noticed. B. Poor assessment of coal import requirement The Company assesses the imported coal requirements on an annual and quarterly basis. The prices for the quantity ordered for the quarter are accordingly finalised with the LTA suppliers. Audit observed that quarterly import requirement for April- June quarter of 2015 was decided in March 2015 as 4,50,000 MT of Moranbah Hard Coking Coal which was to be supplied by the LTA supplier M/s Anglo American. In June 2015, the Company requested the LTA supplier to deliver the remaining quantity of 75000 MT in 3 rd or 4 th quarter of 2015-16 to reduce the stock of the company. The coal was finally delivered in the April – June quarter of 2016. As per the arrangement with the LTA supplier, the coal was to be delivered at the price applicable in April-June quarter of 2015. Audit noticed that the price of coal in April-June quarter of 2016 was lower than the price in April-June 2015 quarter by USD 25.50 per MT. As such, the Company could have saved `12.43 crore had it assessed the requirement of coal accurately in March 2015. 146 Report No. 11 of 2018 The Management stated that they reviewed (April 2015) the stock of imported coal and decided to regulate the receipts of imported coal. The reply highlights the fact that the Management failed to assess the actual requirement of imported coal in March 2015 and had to revise the delivery schedule within a month of placing the order, which led to avoidable expenditure of `12.43 crore. C. Sampling and Inspection of imported coal The LTAs with the suppliers stipulated that the seller was to carry out sampling and inspection of the materials at the loading port by a mutually agreed inspection agency. Such inspection report was the basis for accepting the coal quality and making payments. The inspection agency would also retain a part of the sample for independent verification by the purchaser. C.1 Audit observed that during 2013-16, the Company did not exercise its right to independently verify the quality of coal and routinely paid for the quality and quantity established by the mutually agreed inspection agency. The Management stated (June 2017) that in case there were significant, continuing and material deviations in the quality and quantity supplied against the Agreement, the reason would be investigated to reach a mutually agreeable solution. Reply of the Management is not acceptable. Audit test checked seven invoices raised between January and December 2014 and noted that all seven shipments from M/s Werris Creek had total moisture of 12 per cent (maximum tolerance limit being 12 per cent ) and in 11 shipments (out of 25 shipments) during the same period, coal supplied by M/s BHP had ash content of 9.8-9.9 per cent (maximum tolerance limit being 10 per cent ). Despite these persistent borderline quality parameters, the Company did not exercise its right to independently verify the quality of coal. C.2 Rotation of inspection agencies is envisaged in the LTAs for import of coal. The Company selected three inspection agencies with provision of rotation every six months in the LTA signed with M/s Werris Creek (no. 706/2008). Likewise, the LTA signed with M/s BHP (no. 224/10), provided for two inspection agencies to be rotated every five vessels. Audit noticed however, that inspection at loading ports was always conducted (2013-16) by a single agency for both suppliers (M/s Actest for shipments from M/s Werris Creek and M/s SGS for shipments from M/s BHP). The Management replied (June 2017) that M/s Werris Creek had commenced rotation of inspection agencies and stated that as one of the agencies (M/s Bureau Veritas) closed (January 2013) their office, M/s BHP was getting inspection done by M/s SGS till another suitable inspection agency was selected. Reply of the Management needs to be seen against the fact that rotation of inspection agencies is in the interests of the Company to ensure that their results are not biased and are independent in respect of M/s BHP is not acceptable as even after a gap of more than four years, no other Inspection Agency was selected by the Management. 147 Report No. 11 of 2018 C.3 As per LTA signed with M/s Werris Creek (valid till December 2014), guaranteed moisture and total absolute moisture should be upto 10 per cent and 12 per cent respectively. Moisture level beyond 10 per cent would lead to penal deduction in coal price and beyond 12 per cent would lead to rejection of coal. In the new agreement signed with M/s Werris Creek, effective January 2015, the guaranteed moisture and total absolute moisture limits were modified from 10 per cent and 12 per cent to 11 per cent and 13 per cent respectively.