Friday 10 September, 2010

When cost & price are unrelated


KOLKATA : Profits for firms that supply parts to the Indian Railways hit the roof at the height of the economic downturn. Even when prices of constituent metals crashed, prices at which Railways purchased hundreds of finished products continued to balloon. The reason for this is that as much as 80 per cent of Railways procurement is uncompetitive. The supply market is cocooned in oligopolies. Approved vendors form cartels, doctor prices, and fleece the public exchequer no matter what the real market conditions.

Take signal and telecom cables, purchased in enormous quantities by Railways. Two kinds of cables are laid alongside railway tracks: underground jelly-filled quad cables and optic fibre cables (OFC). Quad cables are made of copper, aluminium, iron, and PVC compound. In a March 2007 tender, S.E. Railways purchased 439 km of quad cables at Rs. 1,54,000 per km. In December 2008, amidst the global economic crisis, the same zonal railway purchased more cables at a significantly higher rate of Rs. 1,84,000 per km. A standard price variation clause analysis, which uses rates of constituent materials published by the Indian Electrical and Electronics Manufacturers Association (IEEMA), finds these cables overpriced by around Rs 60,000 per km. In December 2008, IEEMA rates for copper, aluminium, PVC compound, and iron fell by 41, 19, 5, and 9 per cent respectively. Yet, the quad cable price shows a 20 per cent jump, and is almost 50 per cent over what the market rate should have been:

By chance the quad cable cartel collapsed in bidding for a September 2009 tender, exposing the first unfixed rate in years. Southern Railway ended up purchasing 340.37 km of cable at Rs 1,37,950 per km. This represents a fall of 25 per cent in cable price despite IEEMA rates of copper and PVC compound being on an upswing at the time, having increased by 81 per cent and 15 per cent respectively. Railways purchase prices have little to do with real market prices.

High-priced loot by the quad cable cartel is an old phenomenon. It finds damning mention in numerous CAG reports and Controller of Stores meeting minutes. A Railway Board letter written in March 2010 again admits to the continuing robbery. But, with no changes in policy, arbitrary prices quoted by suppliers continue to be accepted. The case of OFC is similar. A 2006 CAG report noted prices of OFC and quad cables fluctuating between 10 and 150 per cent higher at the same time across zones between 2002 and 2004. Such price increases for OFC continued during the economic downturn.

A Southern Railways tender committee expressed shock at the price quoted in a June 2008 tender, an unjustifiable increase of 44 per cent. In response to the behaviour of the approved firms, Sterlite Technologies Ltd. and Vindhya Telelinks Ltd., Southern Railways recommended the Railway Board take "stern exemplary action" against them and de-approve or downgrade the firms. The firms still remain approved suppliers.

Sterlite Technologies is a subsidiary of the Anil Agarwal owned Vedanta Resources, while Vindhya Telelinks is a joint sector venture between an MP Birla Group concern and Madhya Pradesh State Industrial Development Corporation. In 2000-01, during the exposure of the NDA telecom scam, the same two companies and their sister concerns were accused in Parliament of forming cartels and doctoring OFC prices. Sterlite Technologies, was formerly Sterlite Optical Technologies Ltd., a 100 per cent Export Oriented Unit, accused of evading duties and transferring its OFC for sale through its domestic unit by Central Excise Officials, for which it was directed to pay a fine of approximately Rs. 250 crore. The case involving this payment of fine, which saw the present Home Minister and his wife representing Sterlite at one stage, is still in court. A total of 9,000 km of OFC cables will be procured by Railways in the next few years, which the same firms are set to supply.
Source The Statesman, Kolkata

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