Tenders Invited: The story told by Shourie poured inflammable oil on troubled waters. In January 1980, a few days after Mrs Gandhi's Congress(I) juggernaut, driven by Sanjay Gandhi and his boisterous, impatient and aggressive lieutenants, rode back to power, the IOC floated a tender.
No 1/80, for the import of 500,000 tonnes of HSD and 300,000 tonnes of superior kerosene oil. The large volumes were unusual, but hardly surprising. The country was in the grip of a harvest failure after the bad 1979 monsoon, and the demand for energy was rising fast.
The kerosene tender was routinely handled. The HSD tender took an entirely different course. Oil products are normally bought by a special group of officials and experts from IOC and Ministries such as Petroleum and Finance, who make up an Empowered Committee sanctioned by no less than the Cabinet. This committee was set up during the Janata period when India's petroleum purchases on the open market (as opposed to government-to-government sales) began to go up.
The idea, as one official said, was "to keep politics out of it". Tenders were received confidentially on telex (the system was changed to sealed covers later) for scrutiny by the committee, which made up its mind independently and told IOC which orders to place. Once issued, tender conditions weren't changed, negotiations weren't permitted nor were prices allowed to be varied.
As important was the fact that India, in keeping with the global practice, placed its long-term contracts on a "variable price" basis, that is, it would pay for the products it ordered not at a "fixed price" determined in advance but at a price which bore a pre-formulated relation to the prices prevailing in one of the four important petroleum markets (Singapore, Rotterdam, the Gulf or Mediterranean ports) at the time of shipment. In the hundreds of deals struck by IOC, this practice had been abandoned just six times between September 1976 and September 1979, but for much smaller amounts of naphtha, fuel oil and kero sene.
Unprecedented: Petroleum Minister P.C. Sethi thumbed his nose at each of these established procedures. First, he extended the validity of the tender from February 15 to 22, then changed its conditions unilaterally, asking for oil tenders to be quoted on a fixed price basis, and finally ordered the elimination of those who would not concur - a step which left just two of the original 14 interested parties in the field. Ignoring the Empowered Committee altogether, further ignoring the protests and advice of IOC and Petroleum Ministry officials, Sethi went on to issue a written order directing the placement of contracts with the lowest tenderers.
The net effect of all this manoeuvring was to land India's largest single oil contract order with a private party in the lap of Kuo Oil Ltd of Hong Kong, represented in India by the Delhi-based Hindustan Monark Pvt Ltd. Again, against all normal practices, the suppliers were also permitted to reduce their price marginally on the last day of the submission of the tender. A trivial amount of 30,000 tonnes was also ordered from sitco, a London-based company which had also made a fixed price offer.
"I admit my responsibility," Sethi told India Today when asked about the change to a fixed price contract. "I was of the opinion that OPEC prices would go up." As Shourie demonstrates, Sethi was in a splendid minority of one if he really held this opinion. Summing up the expert view at the time, the then petroleum secretary B.B. Vohra protested against Sethi's actions, arguing that prices were expected to fall in the coming months.
He wrote unambiguously that "in the present situation, a fixed price for a long-term delivery does not appear to be in our interest". Spot prices were showing a falling trend everywhere. At Rotterdam, diesel prices fell from $375 a tonne in early January to $300 at the end of the month and were in the range of $310 on February 22 when the contract was signed. At Singapore, average spot prices fell from close to $390 at the end of December 1979 to $348 at the end of January 1980 and had declined to $333 two days before the contract was signed.
Diesel prices did actually rise for a few weeks thereafter. In Rotterdam they were up to $371 on April 25. But the declining trend proved to be a disaster for India as prices came tumbling down thereafter. Says COPU's 47th report: "It is clear that the subsequent events proved that it was not prudent to have gone in for the purchases.
The Committee fail to understand why the normal procedure of processing the purchase proposals through the Empowered Committee was not followed in this case." And it concluded, the committee "would await a further inquiry for an explanation in this regard".
According to calculations done by IOC, the country bought a total of 512,155 tonnes of diesel from Kuo Oil for a total payment of $I80.9 million. It would have paid almost $10 million less had the same contract been on variable price terms.
All this might have been so much diesel through the pipeline, attributable perhaps to Sethi's innocence of conditions in the world's petroleum market and a not untypical disregard for established procedures, were it not for a curious subsequent development: The disappearance of the Kuo Oil case file No. P-20. Ordinarily file P-20 had no reason to exist. Since oil transactions are handled by the Empowered Committee, the Petroleum Ministry keeps no files concerning individual purchases; it merely keeps track of the decisions of the Empowered Committee.
Not so in this case. With Sethi showing a special interest in the purchase and charting its course from the start, the ministry opened a case file which came to contain records of the exchanges between the minister and his officials, and finally the orders compelling the contract. It was certainly not a file that the Government could afford to be shunted about the place without somebody keeping a careful watch on it.
Yet that is precisely what happened to the file. The last mention of P-20's existence is in the records of the petroleum secretary who on April 18, 1980 sent it to his minister, Veerendra Patil, who had replaced Sethi on March 7. Thereafter, for all practical purposes. P-20 ceased to exist.
And things would have remained that way had it not been for the Government's auditors who, in the course of routine inquiries, found they could not complete their study of India's petroleum purchases in the absence of this one file.
An innocent inquiry from the auditors on December 6, 1980 sent the top officials of the Petroleum Ministry into a flap. Frantic phone calls; numerous letters exchanged; orders up and down the line; personal visits and requests: all produced nothing but a deafening silence. It was dogged persistence over a whole year that yielded key facts:
the file concerned had been sent to the prime minister's house - not office - in 1980:
it was handed over personally by Patil's Private Secretary. K.C. Chennaveerappa. to Mrs Gandhi's Special Assistant, R.K. Dhawan;
no record of its despatch or arrival had been kept in the offices concerned.
No 1/80, for the import of 500,000 tonnes of HSD and 300,000 tonnes of superior kerosene oil. The large volumes were unusual, but hardly surprising. The country was in the grip of a harvest failure after the bad 1979 monsoon, and the demand for energy was rising fast.
The kerosene tender was routinely handled. The HSD tender took an entirely different course. Oil products are normally bought by a special group of officials and experts from IOC and Ministries such as Petroleum and Finance, who make up an Empowered Committee sanctioned by no less than the Cabinet. This committee was set up during the Janata period when India's petroleum purchases on the open market (as opposed to government-to-government sales) began to go up.
The idea, as one official said, was "to keep politics out of it". Tenders were received confidentially on telex (the system was changed to sealed covers later) for scrutiny by the committee, which made up its mind independently and told IOC which orders to place. Once issued, tender conditions weren't changed, negotiations weren't permitted nor were prices allowed to be varied.
As important was the fact that India, in keeping with the global practice, placed its long-term contracts on a "variable price" basis, that is, it would pay for the products it ordered not at a "fixed price" determined in advance but at a price which bore a pre-formulated relation to the prices prevailing in one of the four important petroleum markets (Singapore, Rotterdam, the Gulf or Mediterranean ports) at the time of shipment. In the hundreds of deals struck by IOC, this practice had been abandoned just six times between September 1976 and September 1979, but for much smaller amounts of naphtha, fuel oil and kero sene.
Unprecedented: Petroleum Minister P.C. Sethi thumbed his nose at each of these established procedures. First, he extended the validity of the tender from February 15 to 22, then changed its conditions unilaterally, asking for oil tenders to be quoted on a fixed price basis, and finally ordered the elimination of those who would not concur - a step which left just two of the original 14 interested parties in the field. Ignoring the Empowered Committee altogether, further ignoring the protests and advice of IOC and Petroleum Ministry officials, Sethi went on to issue a written order directing the placement of contracts with the lowest tenderers.
The net effect of all this manoeuvring was to land India's largest single oil contract order with a private party in the lap of Kuo Oil Ltd of Hong Kong, represented in India by the Delhi-based Hindustan Monark Pvt Ltd. Again, against all normal practices, the suppliers were also permitted to reduce their price marginally on the last day of the submission of the tender. A trivial amount of 30,000 tonnes was also ordered from sitco, a London-based company which had also made a fixed price offer.
"I admit my responsibility," Sethi told India Today when asked about the change to a fixed price contract. "I was of the opinion that OPEC prices would go up." As Shourie demonstrates, Sethi was in a splendid minority of one if he really held this opinion. Summing up the expert view at the time, the then petroleum secretary B.B. Vohra protested against Sethi's actions, arguing that prices were expected to fall in the coming months.
He wrote unambiguously that "in the present situation, a fixed price for a long-term delivery does not appear to be in our interest". Spot prices were showing a falling trend everywhere. At Rotterdam, diesel prices fell from $375 a tonne in early January to $300 at the end of the month and were in the range of $310 on February 22 when the contract was signed. At Singapore, average spot prices fell from close to $390 at the end of December 1979 to $348 at the end of January 1980 and had declined to $333 two days before the contract was signed.
Diesel prices did actually rise for a few weeks thereafter. In Rotterdam they were up to $371 on April 25. But the declining trend proved to be a disaster for India as prices came tumbling down thereafter. Says COPU's 47th report: "It is clear that the subsequent events proved that it was not prudent to have gone in for the purchases.
The Committee fail to understand why the normal procedure of processing the purchase proposals through the Empowered Committee was not followed in this case." And it concluded, the committee "would await a further inquiry for an explanation in this regard".
According to calculations done by IOC, the country bought a total of 512,155 tonnes of diesel from Kuo Oil for a total payment of $I80.9 million. It would have paid almost $10 million less had the same contract been on variable price terms.
All this might have been so much diesel through the pipeline, attributable perhaps to Sethi's innocence of conditions in the world's petroleum market and a not untypical disregard for established procedures, were it not for a curious subsequent development: The disappearance of the Kuo Oil case file No. P-20. Ordinarily file P-20 had no reason to exist. Since oil transactions are handled by the Empowered Committee, the Petroleum Ministry keeps no files concerning individual purchases; it merely keeps track of the decisions of the Empowered Committee.
Not so in this case. With Sethi showing a special interest in the purchase and charting its course from the start, the ministry opened a case file which came to contain records of the exchanges between the minister and his officials, and finally the orders compelling the contract. It was certainly not a file that the Government could afford to be shunted about the place without somebody keeping a careful watch on it.
Yet that is precisely what happened to the file. The last mention of P-20's existence is in the records of the petroleum secretary who on April 18, 1980 sent it to his minister, Veerendra Patil, who had replaced Sethi on March 7. Thereafter, for all practical purposes. P-20 ceased to exist.
And things would have remained that way had it not been for the Government's auditors who, in the course of routine inquiries, found they could not complete their study of India's petroleum purchases in the absence of this one file.
An innocent inquiry from the auditors on December 6, 1980 sent the top officials of the Petroleum Ministry into a flap. Frantic phone calls; numerous letters exchanged; orders up and down the line; personal visits and requests: all produced nothing but a deafening silence. It was dogged persistence over a whole year that yielded key facts:
the file concerned had been sent to the prime minister's house - not office - in 1980:
it was handed over personally by Patil's Private Secretary. K.C. Chennaveerappa. to Mrs Gandhi's Special Assistant, R.K. Dhawan;
no record of its despatch or arrival had been kept in the offices concerned.
