When Coal Turned Gold by Partha Sarathi Bhattacharyaa

Author:Partha Sarathi Bhattacharyaa
Language: eng
Format: epub
ISBN: 9789353052072
Publisher: Penguin Random House India Private Limited
Published: 2018-07-24T16:00:00+00:00

Standing Your Ground

Besides these noteworthy decisions for procurement, there was an interesting anecdote about CIL standing like a rock by one of its subsidiary companies—ECL—to thwart aggressive efforts by one of the largest business house of the country to get ECL to award a large contract at an unreasonable price. For the sake of discretion and good order, I shall narrate the episode without taking names.

In 2006, ECL had floated open tenders to engage an agency to increase coal production in one of its large opencast mines by around 70 per cent. After technical scrutiny, only one bidder was found to be eligible. Given the yawning gap between coal supply and demand, it was felt that instead of going for a time-consuming process of retendering, the successful bidder would be awarded the tender, given that the quoted rate was reasonable and in sync with the estimated rate.

Unfortunately, on opening the price bid, the rate was found to be higher than the estimate by a margin of over 50 per cent. ECL then decided to provide an opportunity to the bidder to bring down the rate and try to come closer to the estimate. The revised rate quoted by the bidder was lower than the original bid by a margin of less than 1 per cent.

The matter was carefully deliberated upon and a decision was taken to seek the opinion of a globally reputed consulting firm on whether or not the bid rate was unreasonable. In retrospect, I feel this reference was avoidable as it only revealed a lack of confidence in the finance department’s capability to come up with a sound estimate.

What was intriguing was the response of the consulting firm. The contract involved payouts over a long period, resulting in additional production of coal during the same term. The present value (PV) of the aggregate payout, discounted at the rate prescribed in the tender, represented the value of cash outflow. This, when divided by the time stream of coal production discounted at the same rate, yielded the long-range marginal cost (LRMC) of coal which was to be compared with the department’s estimate prepared on the same lines.

The consultant chose to discount the time stream of cash outflows and divide the same by the arithmetic aggregate of the time stream of coal production without discounting. This led to the cost being shown to be artificially lower and closer to the department’s estimate. The consultant therefore concluded that the bid rate was reasonable.

On being questioned about why the time stream of coal production was aggregated without discounting, the consultant expressed that since coal is not cash, the principle of discounting cannot apply. Upon being specifically asked whether a tonne of coal today would be the same as a tonne of coal tomorrow, they feigned ignorance.

At this stage, the matter was brought to my notice by Smarajit Chakrabarty, the CMD of ECL, and A.K. Sinha, ECL’s director (finance). They strongly felt that accepting the consultant’s report would be a gross mistake and subject to severe questioning at a later stage.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.