Punatsangchu-1 Power House

PHPA-I’s Finance Wing nullifies Nu 7.19 bn in ‘bogus claims’ by two contractors

A reliable source says pressure was put to ‘go easy’ on these claims. The P-1 MD refuted such pressures were put

Nu 3.9 bn claim by L&T is again being ‘reviewed’ by PHPA despite the senior PHPA dispute committee headed by Director Finance ruling against it in a report

Nu 3.29 bn of separate claim by HCC nullified by the Finance Wing has not yet to appealed to the committee

The Punatsangchu-1 Hydroelectric Project Authority’s (PHPA) Finance Wing led by its Director Finance, Pranav Kumar Mallick, in two reports has nullified the additional claims of two major Indian contractors Hindustan Construction Company (HCC) and Larsen and Toubro (L&T) coming to a total of Nu 7.19 bn.

HCC in July 2019 submitted additional claims of Nu 3.29 bn but the PHPA Finance Wing after a thorough review of the claims, payments maid and the contract document nullified these claims in December 2019.

L&T had raised 13 claims coming to Nu 3.9 bn which again after a thorough review was nullified by a committee led by the Director Finance and composing of Director Technical and the Joint Managing Director (JMD) on 6th May 2020.

The nullification was done on the grounds that the claims made by the two contractors were not only not admissible as per the contract agreement, but that they had already been paid more than enough for time extensions and so the claims were ‘bogus claims’.

Added to this was the fact the more outdated PHPA bid documents compared to the more updated Mangdechu documents had already allowed for ‘very generous’ compensations to the two contractors for any delays which would not have been possible in another project like Mangdechu with a different contract document.

HCC

The HCC Project Construction head Sajith Kumar said that they did not receive much of an explanation on why the company’s claims of Nu 3.29 bn was not paid. He said that the HCC management is waiting for the project to be completed and will then settle the issue after that in the final claims.

Sajith Kumar said that his company took up construction of the power house complex, switch yard, 1500 meters of the Head Race Tunnel, surge shaft. He said delay happened as firstly there were delays in approval of the drawings and secondly there were geological surprises that delayed the work and led to the increase in the quantity of scope of works.

He said the project was supposed to be completed by 2015 but there has been delays due to the above two factors and so the Nu 3.29 bn was mainly the costs of the machinery maintenance and expenses on manpower who have been idle and cannot be deployed elsewhere. He said the monthly establishment cost for HCC is Nu 12 mn to Nu 15.

He said the original scope of the works was Nu 6.88 bn which was increased by Nu 3.88 bn and so the total approved works will be around Nu 10.70 bn when it is completed.

He said that the Nu 3.29 bn is in addition to this Nu 10.70 bn. Sajith said that it may be acceptable that PHPA deducts certain amounts against the claim but it should at least pay 90 to 80 percent of the Nu 3.29 bn of additional claims.

A reliable source, however, refuted the position of HCC. He said that the Nu 3.29 bn in additional claims submitted by HCC were for idling charges for the contract being extended but the contract document does not allow for it.

The source said that HCC is in fact responsible for the slow works and time extension has been granted under the contract. The source said that if the delay is due to the project then the contract allows for a price escalation factor where the prices of items are increased as per inflation and then paid.

The source explained that HCC’s claims went beyond that too.

The source said that there was some delay in taking a decision as some people dragged the issue on for a while until the Finance Wing of PHPA took a call and nullified the claims.

L&T

N.K Singh of L&T said that till date his company has not got any formal communication from the PHPA on the issue and so he does not know the exact figures and is unable to comment on their decision. L&T has the main dam works which it is doing.

The reliable source said that the claims of L&T consisted of 13 claims some of which went a decade back to the start of the project and came to a total of Nu 3.9 bn. The communication on the claims, however, started around two to three years ago.

The claims had been rejected by the Engineer-in-Charge on the ground and L&T was appealing to the MD.

A committee had been formed in January 2019 by the PHPA MD led by the Director Technical but the committee never met and the contractor mounted the claims again in October and November 2019.

The MD reconstituted the committee but again nothing happened for months.

In March 2020 the PHPA Chairman Lyonpo Loknath Sharma issued a letter and asked the Director Finance to take the lead of the committee though the DT was supposed to be the convener. The committee in a period of around 2 months looked into correspondence going back to 10 years, international best practice and the contract laws of Bhutan.

The source said the discussions went into great detail to ensure that it can even withstand the highest levels of judicial scrutiny.

The source said the committee’s conclusion was that the claims were not admissible from any angle and the claims were in fact ‘bogus and spurious’.

The source said that certain ‘pressures’ we brought on the committee from outside to ‘go easy’ on certain claims but the committee ignored such pressures. Pressure was also put to share a copy of the report but the committee ignored that too.

“All kinds of petty big and small claims which are not admissible had been put like reimbursing tax concessions, labour medical check up, stock piling, some fees etc.,” said the source.

The source said that pressure was even put not to submit the report directly to the two governments but to allow a review at a lower level but the committee led by the Director Finance did not agree and the report was submitted directly to the two governments in the form of the MoEA Minister as the Chairman of the Authority and the Authority members of the GoI who are the Joint Secretary North Ministry of External Affairs (MEA), Additional Secretary Financial Advisor (MEA) and Joint Secretary Hydro of the Power Ministry.

Another issue brought forth by the source was the allegation that L&T had also been lobbying in the Power Ministry in India on these claims.

The source said that it is unprecedented that contractors are putting up additional claims when the project is not even completed as the practice elsewhere is to only put up such claims when a project is done.

The source said that the whole aim of the committee submitting the report directly to the two governments is to prevent any possibility down the line of these bogus claims being entertained for whatever reasons.

One major reason for the committee not entertaining the claims was the fact that L&T had already got a significant amount of money due to a price escalation clause in the contract.

In March 2009 when L&T had just been given the dam works the worth of the works was Nu 12.5 bn and the work was supposed to be done in six years.

At the end of six years L&T had received Nu 14 bn but the dam was far from complete.

Till 2020 L&T has been paid Nu 27 bn primarily due to the price escalation clause in the contract. The cost escalation is around 10 to 15 percent increase every year.

The source said that L&T had in fact gained from all the price escalation and it was in no position to put up such additional claims.

The source said that in fact the P-I contract document was far more liberal and generous in the price escalation clause than the Mangdechu project contract where similar price escalations would not have been allowed.

Giving an example, the source said that under the Punatsangchu bid document even if the works were for earthwork where no cement and steel was used, the contract still allows for escalation on the account of cement and steel too.

On the other hand, in the Mangdechu project the source said their price section and escalation is far superior as escalation would not be provided for the cement and steel if only earthworks are done.

The source said that this is why it is so important to have good contract management as the contractors can drag on the works given the benefit involved.

The source said that difference in the two contract documents could be due to the fact that the P-1 bid document may have been the system in 2008-09 and the Mangdechu one may have evolved by 2012.

The Director Finance finished his term by the 28th May but he has been asked to serve till the 30th of June by the two governments given the COVID-19 situation when no replacement is possible for the moment.

However, before that, the Director of the Department of Hydropower and Power Systems had written on 28th February 2020 and 12th May 2020 asking the GoI to replace the Director Finance (DF) citing the tenure date as 25th May after which the DHPS said DF would be replaced by the Chief Finance Officer PHPA-1. However, the actual tenure of the DF was 28th May 2020.

PHPA Management speaks

The PHPA MD Mr. Bansal said that the HCC and L&T claims had been rejected by the Engineer-in- Charge first and not the Director Finance directly and so as per the dispute resolution clause in the contract the L&T contractor appealed to the MD who had to constitute a three-member committee of the DF, Director Technical (DT) and the JMD.

The HCC is yet to appeal to this committee.

The MD said the protocol and due process is that the DF should have submitted the report to the MD only, but the report was instead given directly to Lyonpo too and to others. The MD said he is supposed to review the report by the committee.

The MD said that an appeal does not mean that everything is paid nor does it mean that everything has to be rejected too.

The MD also denied that any pressure was put on the committee but he said that the committee was only reminded to submit the report as the committee was taking some time.

Lyonpo speaks

Lyonpo Loknath Sharma who is the PHPA Chairman said that the report submitted to him has been given back to the PHPA MD and the DHPS to go through and the former MoEA Secretary Dasho Yeshey Wangdi would also give advice on the issue.

Lyonpo said that they would look into the claims. The minister said that some details are still required saying that there are so many contract clauses and the project should be on the right side if the issue goes into arbitration or the judiciary.

The minister said most of the claims will not get anything but some areas could be looked at.

The source counters

The source said that while the MD claims due process was not followed in the report being submitted to Lyonpo, it was under Lyonpo’s written instruction that the DF had been asked to head the committee and submit the report to Lyonpo.

It was pointed out that the MD had been given the original report and Lyonpo was only given a copy.

On the MD’s claim that the Engineer-in-Charge refuted the two claims and not the Finance Wing, the source said that the Engineer-in-Charge is only appointed as an intermediary to communicate the decisions and communications of the project.

The source said that the HCC claim was filed in July 2019 with the Engineer-in-Charge but the Finance Wing was not even aware until around October 2019. The source said that the contractor filing such large bogus claims and project officials sitting on it for months can lead to the breeding ground for malpractices.

The source said once the Finance Wing became aware of the claims by coincidence then the DF pressurized that the matter should be put on file to make it official and a decision should be taken soon.

Once on file, the Finance Wing under the DF went into the claims and by December 2019 nullified the Nu 3.29 bn claims as being bogus.

Despite this decision in December 2019, it was only communicated by January 2020 by the Engineer-in-Charge with a backdated letter of December 2019.

The source said that while the MD was given the report, the MD has no powers or right to make any changes to the report of the committee as the contract document itself says that the decision of the committee will be conveyed by the DT to the contractor.

The source, however, said that the committee or even the project itself is not given the power to settle such claims and such power only lies with the authority which is another reason why the report was shared with the members of the authority.

Another point made by the source is that under the Constitution of the Authority signed in 2008 the DF has the power to inform the authority of any serious financial matter and Nu 3.9 bn in bogus claims that came before the committee is a serious financial matter.

The Bhutanese repeatedly tried to contact the various other officials mentioned by the source but they did not respond and in one case a senior official had even blocked the mobile number of the reporter.

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One comment

  1. The price escalation is only a compensation for the increased cost incurred on material , equipment use, electricity & fuel input and man power incurred by the Contractor in executing the works in longer time duration legitimately allowed for reason’s beyond responsibilities of the Contractor for such delayed durations.
    Therefore, payments made due to price escalation clause of the Contract are in no way a replacement to the legitimate claims of the Contractor for having been made to idle its equipment and man power due to reasons like delay in providing designs and decisions. Such cost born by Contractor on lack of performance of Consultants in delaying the decisions and drawings would be tenable in all probability and genuineness.
    Secondly to suggest that Contract clause are unnecessarily paying under the price variation clause compensating for steel and cement for works not involving such material is also perhaps not tenable, as these clause are agreed in mutual contract ship which was already considered for their effect by all the bidders in making their bids competitive. Therefore payments made to Contractor under price variation clause can’t be considered as undue advantage to the Contractor.
    Thirdly to suggest that time Extension provided for the delays is a compensation for forcing the situations and conditions on Contractor in which the equipment and man power was made idle, is also perhaps not tenable because no time extension against the delays made on the part of Contractor can be legitimately granted. Therefore the time extension granted for the delays made in communicating the decisions and drawings for execution are rightful claim of the Contractor to carry out the execution on the decisions and drawings given to the Contractor after the delayed decision and drawings were communicated. Therefore the time extension granted for such delays on the part of Consultants and Project Authorities is not a compensation for the cost incurred by the Contractor in bearing the cost of maintaining the equipment and man power without being put to use and not communicated to be demobilized . If asked to demobilize then the charges of mobilizing the equipment and man power are required to be paid, which may have not happened, though questionable fir it’s reasonableness.

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