Contract Procurement Management Report of  Ntpc
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Contract Procurement Management Report of  Ntpc Contract Procurement Management Report of Ntpc Document Transcript

  • SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN INTERNATIONAL BUSINESS “CONTRACT & PROCUREMENT MANAGEMENT AT NTPC” SUBMITTED BY: Madan Nagar MBA-IB(2005-2007) Roll No. : A1200307E84 INDUSTRY GUIDE FACULTY GUIDE Sh. Dinesh Bahuguna Ms. Saurav Raina Senior Manager(Finance) Finance Faculty NTPC Noida AMITY INTERNATIONAL BUSINESS SCHOOL, NOIDA AMITY UNIVERSITY – UTTAR PRADESH
  • Company Certificate (In the LETTER HEAD of the Company) TO WHOM IT MAY CONCERN This is to certify that _____________________, a student of Amity International Business School, Noida, undertook a project on “___________________” at ________________________ from __________to _____________. Ms./Mr.________________ has successfully completed the project under the guidance of Mr./Ms.____________________. She/He is a sincere and hard- working student with pleasant manners. We wish all success in her/him future endeavours. Signature with date (Name) (Designation) (Company Name) ii
  • CERTIFICATE OF ORIGIN This is to certify that Mr. Madan Nagar, a student of Post Graduate Degree in MBA-IB (2005-2007), Amity International Business School, Noida has worked in the NTPC-Noida, under the able guidance and supervision of Mr.Dinesh Bahuguna, designation: Senior Manager (Finance), Company: NTPC, Noida. The period for which he was on training was for eight weeks, starting from 4th May 2006 to 30th July 2006. This Summer Internship report has the requisite standard for the partial fulfillment the Post Graduate Degree in International Business. To the best of our, knowledge no part of this report has been reproduced from any other report and the contents are based on original research. Signature Signature (Faculty Guide) (Student) iii
  • ACKNOWLEDGEMENT I am thankful to Amity International Business School, for giving me an opportunity to work with a prestigious organization like National Thermal Power Corporation (NTPC). The experience has been highly educative in terms of both theoretical and practical knowledge in the area of Finance. The summer stinct at NTPC has strongly added value to my learning curve. I express my sincere gratitude to my industry guide Mr. Dinesh Bahuguna, Designation: Senior Manager (Finance), Company: NTPC, Noida, for his able guidance, continuous support and cooperation throughout my project, without which the present work would not have been possible. I would also like to thank the entire team of NTPC especially Mr. V Vasu, DGM (F), Mr. AA Sheikh, DGM (F), Mr. RS Sodhi, DM (F) and Mr. Vishal Garg, for the constant support and help in the successful completion of my project. I am thankful to my faculty guide Ms.Saurabh Raina, of my institute, for her continued guidance and invaluable encouragement. Also, I am thankful to my Prof. Mr. Ajeet Mittal, for his valuable guidance and support during the project. Signature (Student) iv
  • TABLE OF CONTENTS Chapter No. Subject Page No. Ch.-1.0 Executive Summary…………………. Ch.-2.0 Research Methodology……………… 1.1 Primary Objective(s)…………. 1.2 Hypothesis…………………… 1.3 Research Design……………… 1.4 Sample Design……………….. 1.5 Scope of the Study……………. 1.6 Limitations……………………. Ch.-3.0 Critical Review of Literature……….. Ch.-4.0 Company Profile ……………………. 4.1 Industry Profile……………….. 4.2 Swot Analysis…………………. Ch.-5.0 Data………………………………….. 5.1 Collection……………………… 5.2 Primary Data 5.3 Secondary Data….…………….. Ch.-6.0 Findings & Analysis…………………. Ch.-7.0 Recommendations…………………… Ch.-8.0 Bibliography…………………………. Ch.-9.0 Annexure…………………………….. 9.1 Tables…………………………. 9.2 Graphs………………………… Ch-10.0 Case Study ……………………....…... Ch-11.0 Synopsis of the project……………….. v
  • EXECUTIVE SUMMARY The report entitled “BIDDING AND FINANCIAL ANALYASIS OF N.T.P.C. ” is about the purchase practices followed at NTPC. These practices are followed during all procurement by NTPC. The purchase procedure starts at Indenting by the department that requires the material and goes to the cost department and finance department for required approval. In between various activities like Liquidated Damages calculation, Spare Parts procurement terms, Guarantee in Liability Defect period etc are undertaken. Once all the terms and conditions are formulated and approved, the tender document preparation starts. The tender documents are issued to the prospective bidder for a cost that starts from Rs 200 to Rs 3000. The content of the tender document is prepared in such a manner that the prospective bidder comes to know about all the important details about the contract. The issuance of tender document is followed by the receipt of Bids from various vendors in the specified format. Once all the bids are received, they are opened in presence of some nominated officials from Finance, Contracts and Materials department. The representatives from the bidders may also be present. Then a comparative statement of the quoted bids is prepared and the contract is awarded to the lowest quoting bidder. During the document preparation phase, payments terms are also decided and documented in the General Condition of Contract, which is issued to the bidder with the tender documents. Apart from payments, there are various other issues like Arbitration, which are dealt in the tender documents. Liquidated Damages is one of the very important clauses. Liquidated damage is a payment to be made by the contractor in case he fails to complete the project in the stipulated time. In case of equipment, it is related to the performance of the equipment. The purchase is followed by the evaluation, which is done for two things, the vendor’s performance and the purchase performance. The Vendor evaluation comes in handy for placing future orders where as the Purchase Performance evaluation provides detailed insight into the procedures being followed to procure the required material. vi
  • RESEARCH METHODOLOGY Primary Objective :- The objective is to study the “BIDDING AND FINANCIAL ANALYASIS OF N.T.P.C. ” procedures followed at NTPC . The observations were carefully analyzed and some constructive facts and figures were revealed. On the basis of those observations some recommendations and suggestions for NTPC have been drafted. The research methodology comprised of secondary data collected from various NTPC records and through NTPC website and India Infoline.com. Sample Design:- for the research activity to turnout into a success, a careful selection of various Project was made. All possible effort was made to choose the unbiased data to get the fruitful result. Scope of the Study :- This effort is to understand the procurement practices followed at NTPC and understand what they keep in mind before awarding a particular bid contract to the specific bidder. It will also recommend the points to NTPC to improve upon to get the maximum chunk in the power industry. Limitations :- • Time factor. • 1
  • Industry Profile The electricity services in India were generally provided by the State Electricity Boards (SEBs), as it was believed that being under the control of the State governments, they could protect the consumer interests against exploitation. Over a period of time, it however, came to be realized that because of their monolithic nature, the State Electricity Boards suffered from operational inefficiencies on account of which they had incurred heavy losses. The services rendered by them were also of poor quality. These factors forced the governments to think in terms of commercialization of the services so that the additional investments necessary for infrastructure development become available through private sector involvement and the services rendered become globally competitive. Central Government issued a policy resolution dated 22-10-1991 on private sector participation in power sector. It was followed by necessary changes in the legal framework. Despite the policy of liberalization, the entry of new players continued to be regulated by the government who remained the final arbiter in all matters, including tariff fixation. It became necessary, therefore, to provide a level playing field to new players and to provide for competition. It was decided to encourage private sector participation in the generation, transmission and distribution since future expansion could not be achieved through public resources alone. Thus, the phenomenon of private sector involvement in power sector is a relatively modern reaction to the revealed concerns and issues associated with complete reliance on the public sector provision of infrastructure. It should also be decided to set up independent Central and State Regulatory Commissions. Promotion of competition, efficiency and economy in electricity industry can be conveniently achieved through the process of competitive bidding. The Central Government issued detailed guidelines for competitive bidding of power projects in January 1995 whereby the competitive procurement of power sector projects was made mandatory. These guidelines laid emphasis on project identification, justification and development before taking up competitive bidding. Growth of economy calls for a watching rate of growth in infrastructure facilities. Power sector is one of the major aspects of this infrastructure building. Some prominent people like the Ex Chairman of GE Jack Welch have gone to the extent of saying, “you don’t have a chance to stand in the 21st century without lots of power………Without this you miss the next revolution.” 2
  • Moreover, the growth rate of demand for power in developing countries is generally higher than that of GDP. In India, the elasticity ratio was 3.06 in 1 st plan, and peaked at 5.11 during 3rd plan and came down to 1.65 in 80’s. For 90’s a ratio of around 1.5 was projected. Hence, in order to support a growth of GDP of around 7% the rate of growth of power supply of 10%is required. If we look at current scenario, electricity consumption in India has more than doubled in the last decade, outpacing the economic growth. If we analyze the various statistics of Indian power sector, we will find that the generating capacity has gone up tremendously from a meager 1712MW in 1950 to a whooping 112000MW today. GROWTH OVER YEARS: INSTALLED CAPACITY AROUND THE END OF PERIOD: 250000 212000 200000 CAPACITIES 150000 112000 100000 66000 50000 28000 13000 0 1700 4600 1950 2 1 1960 31970 1980 1990 2000 8 4 5 6 7 20129 YEARS At the same as a result of growing installed capacity, the power produced has also gone up. In 1950, the total power produced by Indian power sector was a meager 50BU and that is now 587.3BU. Now a days when world is transforming into a global village and economies are opening up, a substantial and reliable infrastructure is a must for any economy to develop. Electricity is one of the most vital parts of any economic structure. The govt. of India had realized it way back in 60’s that to develop the economy and be economically independent, one must be independent in one’s power generation. And hence the Indian govt. emphasized the need of independence in power generation and in all subsequent five-year plans the allocated budget for power sector development was increased. But despite all these efforts by our govt., there is an acute power shortage in the country. Despite all efforts, a no.of states particularly the northern and western region are faced with severe power shortage. The projected power consumption for next 10 years is not very comforting either. Capacity expansion in power sector is outpaced by economic 3
  • development and hence widening the gap between the demand and supply of electricity. We can see the projected figures for the coming years in the diagram below: POWER DEVELOPMENT- 16TH EPS PROJECTIONS: PEAK REQUIRMENT IN BILLION UNITS: PEAK AND ENERGY REQUIRMENT 1800000 1600000 1574107 1400000 1200000 1000000 800000 600000 400000 200000 78037 85132 115705 0 507 529 719 976 MAR'01 MAR'02 MAR'07 MAR'12 YEARS The growth rate of power sector is shown in the diagram below: 6 5 5.1 5.2 4 billion units 3.4 3 2 1 0 02-'03 03-'04 04-'05 years Generation during the years has been as follows: 700 587 600 533 552 513 500 billion units 400 Series1 300 226 240 Series2 202 213 200 100 0 01-'02 02-'03 03-'04 04-'05 years 4
  • Power availability has been as follows: 550000 540000 530000 availability(MU) 520000 510000 500000 490000 480000 470000 460000 450000 01-'02 04-'05 years While energy shortage during the same period has been as follows: 7.55 7.5 7.45 Shortage(%) 7.4 7.35 7.3 7.25 7.2 01-'02 04-'05 years And peak deficit during the same period has been as follows: 12.8 12.6 12.4 deficit(%) 12.2 12 11.8 11.6 11.4 11.2 01-'02 04-'05 years 5
  • There has been an improvement in last three years with 13% increased power availability. However, we could reduce energy shortage by a meager 0.2% while peak deficit by a meager 0.9%. We could have generated 18b units more had we not suffered gas and coal shortages. However, we are now set to achieve 10th plan target of about 41000 MW as the projects worth 10959 MW have already been commissioned and project worth 24152 MW are under execution. In accordance with electricity policy a substantial portion of under utilized capacity plants are targeted to be brought under the grid. PROFILE OF NATIONAL THERMAL POWER CORPORATION LTD. (NTPC) National Thermal Power Corporation Ltd. (NTPC) a global giant in the power sector was set up on 7th November 1975, with an objective to accelerate the electricity generation by planning, promoting and organizing integrated development of thermal power in India. Today; NTPC is the largest power generating company in India and contributes one-fourth of the thermal energy generated in the country. It has 463 rank in the World Top Class 2000 Companies which is improve from the last year rank i.e. 486.Over all these years NTPC has been an organization which has delivered expected performance in all the spheres of its business activities and meeting all the challenges for growth and operation through adoption of excellent management system and practices. The success of NTPC is the result of a modest but systematic beginning. NTPC known as the NAVRATANS of PSU’S have central govt. and the finding agencies as one of their major stakeholder. Railways are the major supplier of NTPC. If anything which is manufactured is to be sold out. In the same manner NTPC also has some of its buyers. The main buyer’s who purchase electricity from NTPC are the state electricity board (SEB’S) and the state govt. It will be much more clearly from the following diagram below: 6
  • NTPC- BACKGROUND NTPC – a global giant in power sector Source: www.ntpc.co.in National Thermal Power Corporation Limited (NTPC) is the largest thermal power generating company of India. A public sector company incorporated in the year 1975 to accelerate power development in the country as a wholly owned company of the Government of India. At present, Government of India holds 89.5% of the total equity shares of the company and the balance 10.5% is held by FIIs, Domestic Banks, Public and others. Based on 1998 data, carried out by Data monitor UK, NTPC is the 6th largest in terms of thermal power generation and the second most efficient in terms of capacity utilization amongst the thermal utilities in the world. NTPC's core business is engineering, construction and operation of power generating plants and also providing consultancy to power utilities in India and abroad. As on date the installed capacity of NTPC is 23,749 MW through its 13 coal based (19,480 MW), 7 gas based (3,955 MW) and 3 7
  • Joint Venture Projects (314 MW). NTPC acquired 50% equity of the SAIL Power Supply Corporation Ltd. (SPSCL). This JV Company operates the captive power plants of Durgapur (120 MW), Rourkela (120 MW) and Bhilai (74 MW). NTPC is also managing Badarpur thermal power station (705 MW) of Government of India. Source- www.indiainfoline.com NTPC’s share on 31 Mar 2004 in the total installed capacity of the country was 19.4% and it contributed 27.1% of the total power generation of the country during 2003-04. NTPC has set new benchmarks for the power industry both in the area of power plant construction and operations. It is providing power at the cheapest average tariff in the country. With its experience and expertise in the power sector, NTPC is extending consultancy services to various organizations in the power business. NTPC has entered into a joint venture with Alstom, Germany for renovation and modernizations of power plants in India. NTPC has taken proactive steps for ash utilization. In 1991, it set up Ash Utilization Division to manage efficient use of the ash produced at its coal stations. This quality of ash produced is ideal for use in cement, concrete, cellular concrete, and building material. 8
  • STAKE HOLDERS CENTRA L GOVT FUNDING AGENCIE S S U OIL B P SUPPLY U P Y L E I R E SEB’ S R S S NTPC COAL SUPPLY STATE GOVT RAILWAYS EQUIPMEN T SUPPLY 9
  • NTPC’s share on 31 Mar 2004 in the total installed capacity of the country was 19.4% and it contributed 27.1% of the total power generation of the country during 2003-04. CORPORATE PLAN The company has formulated a long term Corporate Plan for 15 years upto 2017. The Corporate Plan seeks to integrate the Company’s vision, mission and strategies for growth with the national plans and to provide the company the cutting edge in the emerging competitive environment. NTPC is targeting to become a ’46 000 MW Plus’ company by 2012. (A) Projects under construction Total Capacity - 10990 MW Project Capacity Fuel Commission Schedule (State) (MW) Vindhayachal - III 1000 Coal Unit – IX Feb 2007 (Madhya Pradesh) (2x500) Unit – X Aug 2007 Unchahar III 210 Coal Unit – I Sep 2006 (Uttar Pradesh) (1x210) Kahalgaon Phase II 1000 Coal Unit – V Nov 2006 Stage I (Bihar) (2x500) Unit – VI May 2007 Kahalgaon Phase II 500 Coal Unit – VII Mar 2007 Stage II (Bihar) (1x500) Sipat - I 1980 Coal Unit – I Apr 2008 (Chhattisgarh) (3x660) Unit – II Feb 2009 Unit – III Dec 2009 Sipat - II 1000 Coal Unit – I Jun 2007 (Chhattisgarh) (2x500) Unit – II Dec 2007 Koldam 800 Hydro Unit – I Nov 2008 (Himachal Pradesh) (2x400) Unit – II Jan 2008 Unit – III Mar 2009 Unit – IV Apr 2009 Barh 1980 Coal Unit – I Mar 2009 (Bihar) (3x660) Unit – II Jan 2110 Unit – III Nov 2010 Bhilai Exp. Power 500 Coal Unit – I July 2007 Project, (2x250) Unit – II Oct 2007 JV with SAIL 10
  • (Chhattisgarh) Total 8970 MW (B) New projects being pursued for capacity addition for Eleventh Plan and Beyond In addition to the above, a host of new power projects as given below are being pursued for further capacity addition in the 11th plan and beyond: S. No. Project / State Capacity (MW) 1. Kawas - II, Gujarat 1,300 2. Jhanor Gandhar - II, Gujarat 1,300 3. Nabinagar - JV with Railways, Bihar 1,000 4. Loharinag Pala, HEP Uttaranchal 600 5. Tapovan Vishnugad, HEP Uttaranchal 520 6. Lata Tapovan, HEP Uttaranchal * 171 7. North Karanpura, Jharkhand 1,980 8. Rajiv Gandhi CCPP-II, Kerala 1,950 9. Ennore (JV with TNEB ), Tamil Nadu 1,000 10. Farakka III, West Bengal 500 11. Lara, Integrated Power Chhattisgarh 4,000 Generation project, 12. Darlipalli, Integrated Power 3,200 Orissa Generation Project, 13. Rammam III HEP, West Bengal * 120 14. Hutong II HEP, Arunachal Pradesh 1,250 15. Kalai II HEP, Arunachal Pradesh 1,200 *(To be implemented by NTPC Hydro Ltd, a wholly owned subsidiary of NTPC Ltd.) AN OVERVIEW Commissioned Projects No. of Projects Capacity (MW) NTPC OWNED COAL 14 20, 685 GAS/LIQ. FUEL 07 3,955 TOTAL 21 24,640 11
  • OWNED BY JVCs Coal 3 314* GRAND TOTAL 24 24,954 * Captive Power Plant under JV with SAIL @Additional capacity under implementation • Vindhyachal Stage III 1000 MW • Unchahar Stage III 210 MW • Kahalgaon Stage II - Phase I 1000 MW - Phase II 500 MW Korba Stage III 500 MW VISION OF NTPC: "To be one of the world's largest and best power utilities, powering India's growth". To realize this vision, NTPC has drawn up a detailed Corporate Plan for the period 1997-2012 which represents the company's collective optimism and enthusiasm, inspired by a glorious past, a vibrant present and a brilliant future. The Plan has been prepared in-house in consultation the committed, competent and confident members of the NTPC family. The road map that has been charted out was after a thorough scan of the strengths and weaknesses within the organization as well as opportunities and threats in the environment. Considering multidimensional opportunities in the energy sector, NTPC will adopt a multi- pronged growth strategy for capacity addition through Greenfield sites, expansion of existing stations, takeovers and joint ventures. The capacity addition plans that we have drawn up for the fifteen-year period using all the above strategies to enable the corporation to become a 40,000 MW company by 2012 A.D. In addition to the above, NTPC also has plans to venture into the following areas: • Renovation & Modernization of old power stations through a separate joint venture company; • Investment in LNG terminal; • Investment in coal mining and washeries; • Setting up of power plants abroad; • Joint ventures for ash-based industries; 12
  • • Setting up of small pilot plants using renewable energy sources; • Setting up of hydel power plants to facilitate techno-economic operation of thermal-hydro mix of NTPC stations; Setting up of associated extra high voltage transmission lines / inter-regional EHV transmission lines so as to ensure evacuation of power from NTPC stations. NTPC CORE VALUES: - Known as one of the NAVRATAN’S of the PSU’S NTPC has its following core values. They are: • CUSTOMER FOCUS • ORGANISATIONAL PRIDE • MUTUAL RESPECT & TRUST • INITIATIVE & SPEED • TOTAL QUALITY Every firm, be it a manufacturing concern or a trading concern has to buy something either to trade it as it is or add some value to it. In both the cases the firm is buying and selling the goods or services generated. The value generated between two points in the value chain is the profit generated by that particular chain partner. These values. Be in terms of place, time, quantity of form etc. in the case of NTPC. NTPC buys coal, diesel, and other capital goods and converts it into electricity. Since the raw material is changing form during the value addition process hence NTPC is a manufacturing firm. For every manufacturing concern, the raw material is the cost center after the initial expenditure relating to the capital goods. It is also the most important factor affecting the quality of the product and in case of NTPC the performance. A low-grade coal may not only reduce the efficiency of the plant but may also make it malfunction or might even lead to a sudden breakdown. Hence the plant but may make it malfunction or might even lead to a sudden breakdown. Hence the right quality of fuel is not only desired but is required. Similarly the plants and equipment required to generate the electricity is also to be procured and hence one more purchasing comes into picture. Once the plant is erected and commissioned, during its normal operations the plant may require some spare parts as well as some replacement and maintenance parts. Hence for that also the firm has to maintain a constant supply. So for all this purchase system is another big question. To get an appropriate purchase system structure we 13
  • must identify the actual requirement NTPC has some plants as old as 25 years old, which are using a very aged or aging technology; on the other hand some of its required for these two plants will obviously be different. Similarly some of the plants are located in a well-connected city like Delhi, others are located in very distant places where even the transport is a big problem. So these two types of plant may require different amount of the same material for the same time period. The purchasing procedures at NTPC should be such that it can take care of such extreme differences and provide both the locations with the required material at the right time,. If NTPC procure all the material through a centralized purchasing division which will club all the requirements of various projects together and order on the basis of his clubbed requirement, of various projects together and order on the basis of the clubbed requirement, then NTPC can achieve economies of scale as the quantity bought will be significantly high considering that it has more than 20 projects running in its fold this trade of between the economic efficiency and response is very important as all the plants of NTPC run on 365x24 basis. FINANCIAL STATEMENT ANALYSIS 14
  • A financial statement analysis consists of application of analytical tools and techniques to the data in financial statement in order to derive from these measurement and relationships that are significant and useful for decision making. Financial analysis can be used as the preliminary screening tool in selection of stock in secondary market .It can be used as a forecasting tool of future financial condition and results. It may be used as a process of evaluation and diagnosis of managerial, operating, or other problem areas. The principal tool for the analysis of financial statement is RATIO ANALYSIS. ANALYSIS OF FINANCIAL STATEMENTS :- A ratio gives the mathematical relationship between one variable and another. Ratio analysis mainly helps in valuing the firm in quantitative terms. Financial tool can be grouped as 1) Profitability or efficiency ratio 2) Ownership ratio  Earning ratio  Leverage ratio  Capital structure ratio  Coverage ratio  Dividend ratio 15
  • LIQUIDITY RATIO Liquidity is firm’s ability to pay its debt in short term. Short-term liquidity involves the relationship between the current asset and current liability. If the firm has sufficient net working capital (excess current asset over the current liability) the firm is said to be highly liquid. Current Ratio Current Asset It is define as Current liability Current asset includes cash; marketable securities, debtors, inventories, loan and advances, and pre-paid expenses, current liability includes loan and advances taken, creditors, accrued expenses, and provisions. In operating cycle the current assets are converted into cash to provide the payment for current liabilities. So higher the current asset higher the short term liquidity. Quick Ratio Quick test is also defined as the acid-test ratio Quick Asset It is define as Current liability Current asset – inventories = Current liability The quick ratio is more stringent measure of liquidity, because the inventory which are liquid of current asset, and exclude from the ratio. Inventory Turnover Ratio The liquidity of firm’s inventory may be calculated by dividing the cost of good sold, by the firm‘s inventory The inventory turnover measure that how fast the inventory is moving through the firm and generating sales, 16
  • Inventory turnover ratio Cost of good sold = Average inventory Higher the ratio the greater the efficiency of inventory management. Presence of inventory involves two risks: 1 Running out the inventory due to low inventory (high turnover), which may indicate future shortage. 2 Excess inventory causes the blockage of capital. PROFITABILITY RATIO These ratios measure the firm’s ability to generate profits. These are of two types. These are:- 1) Profit in relation to sales: It is important from the profit standpoint the how much the firm is able to generate the profit with the sales of each unit. Two popular ratios in this category is operating profit margin, net profit margin. 2) Profit in relation to asset It is important that the profit be compared to the capital invested by the owners and creditors, if the firm cannot produce a satisfactory profit on its asset base, it might be misusing its assets. They are also referred to as rate of return. Ratio like asset turnover ratio, earning power, and return on equity fall in this category. Operating Profit Margin Operating profit is basically earning before interest and taxes, it profit generated by operation. Operating profit margin EBIT 17
  • = Net sales Net sales = sales - excise duty Net Profit Margin It is defined as Net profit Net sales This ratio shows the earning left for the shareholders as a percentage of net sales .It measures the overall efficiency of production , administration , selling , financing, pricing, and tax management, Asset Turnover Ratio Asset turnover ratio defined as Sales Average asset It highlights the amount of assets the firm used to generate its total sales. The ability to generate a large volume of sales on a small asset base is an important part of the firm’s profit picture .Idle or improperly used asset increase the firm’s need for costly financing and the expense for maintenance and upkeep. Return on Equity The return on equity (ROE) is an important indicator to shareholders of the firm. It is calculated by the formula: Net Income Average Equity The return on equity measure the profitability of equity fund invested in the firm. It reflects the productivity of capital employed in the firm. It is influenced by several factors: earning power, debt-equity ratio, average cost of debt fund, and tax rate. 18
  • EARNING RATIO The earning ratios are earning per share (EPS), Price-earning ratio (P/E) and capitalization rate. From the earning ratios we can get information on the firm and their effect on price of common stock. Earning Per Share Shareholders are concerned with the earnings of the firm in two ways, one the availability of dividends and other to expand their interest in the firm with the retained earning. EPS can be defined as Net Income (PAT) Number of outstanding share Price–Earning Ratio The price –earning ratio is also called P/E multiple. Market price of share Price-earning multiple = Earning per share This ratio gives the relationship between the market price of the stock and its earnings by revealing how the earning of a firm affects the price of its stock. If a P/E ratio of the stock is very small say 3/1 it may be considered as undervalued stock .If the P/E value of firm is 80/1 it may be considered as overvalued firm . The Capitalization Rate Earning per share Capitalization rate = Market price of share The reciprocal of P/E ratio gives the return the investors generally expect before buying shares. For example if a stock has Rs. 12 EPS and sell for Rs. 100, the market place expect a return of 12/100, i.e. 12% .this is called stock’s capitalization rate. A 12% capitalization rate implies that the firm is required to earn 12 % on the common stock value. If the investor expects less than 12% they will be ready to pay more than current value and the capitalization rate of stock drops. 19
  • LEVERAGE RATIO Debt-Equity The debt-equity ratio indicates the relative contribution of creditors and owners, it can be defined as Debt Equity Depending on the type of business and the pattern of cash flow the component of debt-equity ratio will vary .Normally the debt component consists of all liability including current. The equity component consists of net worth and preference capital. It is the screening device in the financial analysis .If the D/E ratio is relatively high, the owner is putting less money and that is the danger signal for the creditors .If the project of such firm fails the loss is major shared by the creditors and the owner may act irresponsibly .high portion of debt can affect the operation of firm because the creditors can interfere in the operational as well as managerial decision. Debt-Asset Ratio The debt-asset ratio measures the extent to which borrowed fund support the firm’s asset. It is defined as Debt Asset The asset here indicates total of all asset in balance sheet. It is usually held that fixed asset and long term asset should not be financed by short term loans. The most appropriate kind of fund for financing of this kind of assets is equity capital. Interest Coverage Ratio One measure of a firm’s ability to handle financial burden is the interest coverage ratio, also referred to as the times interest –coverage ratio. This ratio tells us how many times the firm can cover or meet the interest payments associated with debt. EBIT Interest coverage ratio = Interest expenses The greater the interest coverage ratio, the higher the ability of the firm to pay its interest expense. 20
  • Degree of Operating Leverage (DOL) Operating leverage examine the effect of the change in the quantity produced on the EBIT of company. Percentage change in EBIT DOL = Percentage change in output Greater the DOL, the more sensitive is EBIT to a given change in unit sales, DOL is therefore indicates the business risk. Degree of financial leverage (DFL) Financial leverage results from the presence of fixed financial charges in firm’s income stream .These fixed charges do not vary with the EBIT. It is defined as the ability of a firm to use fixed financial charges to magnify the effect of change in EBIT on firm’s EPS. Percentage change in EPS DFL = Percentage change in EBIT There will be no financial leverage if there is no fixed-charged financing. Degree of total leverage (DTL) It is combination of operating leverage and financial leverage .The degree of total leverage is the measure of the output and EPS of company .DTL is product of DOL and DFL and can be calculated as follows: Percentage change in EPS DTL = Percentage change in output Or DTL= DOL*DFL. At the break-even point of output the DTL is undefined. At the output less than output DTL is negative. At the output more than output DTL is positive. DIVIDEND RATIO 21
  • Dividend Payout Ratio This is the ratio of dividend per share and earning per share (EPS).It indicates how much of the earnings of company is being disbursed as dividend .If the company believes in high pay-out ratio then it can be said that firm is retaining less that may hamper future growth of company .If the firm need money for financing any project it can retain more and pay less dividend. Dividend Yield This is the ratio of dividend per share and market price of share. DPS Dividend yield = Market price of share The ratio gives the current return on one’s investment .this is mainly interest of investor. GROWTH Growth of firm = retention ratio * ROE. This value gives the annual growth of company taking assumption that whatever firm is retaining is investing and getting the rate of return equals to ROE. COST OF CAPITAL It is the cost of acquiring the fund required to finance the project .i.e. cost of capital is the borrowing rate of the firm, alternatively cost of capital in terms of lending rates may refer to the opportunity cost of the funds to the firm .i.e. what the firm could be earned by investing funds elsewhere. NTPC (Rs. Millions) Years 2005 2004 2003 2002 2001 LIQUIDITY RATIO Current Assets, Loans & Advances 129073 135468 194132 177771.98 160751.7 Current Liabilities & Provisions 67467 80942 45851 58153.09 67324.34 Secured Loans 44407 45844 41226 16455 19655 Current ratio( incl. ST loans) 1.15 1.07 2.23 2.38 1.85 Current ratio 1.91 1.67 4.23 3.06 2.39 Quick ratio 1.65 1.46 3.85 2.71 2.12 inventory 17777 17380 17712 20142 18356 22
  • Operating Income (turnover ) 225402 188491 190475 177697 189449 Inventory Turnover Ratio 12.68 10.85 10.75 8.82 10.32 Fixed asset (after depreciation ) 223148 212545 198650 176781 184657 FIXED ASSET TURNOVER RATIO 1.010 0.890 0.960 1.010 1.030 INVESTORS RATIO Retained Earnings 35600 40398 28600 28317 29106 Reported Net Profit 58070 52608 36075 35396 37338 RETENTION RATIO (RE/PAT) 0.613 0.768 0.793 0.8 0.78 ROE (%) 14.16 15.02 11.59 12.44 14.59 GROWTH g=RETENTION RATIO*ROE 8.68 11.535 9.191 9.952 11.38 Equity Dividend 19790 10823 7080 7079 7470 Number of Equity shares outstanding 8245464400 7812549400 7812549400 78125494 78125494 DPS (DIV./OUT.SHARE S) 2.4 1.385 0.906 90.611 95.615 EPS (PROFIT/ OUT.SHARES) 7.043 6.734 4.618 453.066 477.923 DIV.PAYOUT RATIO (%) 34.08 20.57 19.62 20 20.01 D+E 515404 447555 402336.61 356255.12 329877.86 TOTAL EQUITY (E) 410077 350167 311306 284621 255933 TOTAL DEBT (D) 170878 154528 132157 115812 98048 INTERST PAID (I) 16955 33697 9916 10414 12485 COST OF DEBT (Kd=I/D*100)%(1-t) 6.59 14.48 4.98 5.97 8.46 COST OF EQUITY CAPITAL (Ke) %=ROE 14.16 15.02 11.59 12.44 14.59 OVERALL COST OF CAPITAL = Kd*(D/D+E) +Ke*(E/D+E) OVEALL COST OF CAPITAL(Ko) % 11.93 14.85 9.62 10.57 12.89 MARKET VALUE OF FIRM=EBIT/Ko 713185.25 639643.1 595072.77 530832.5 490768 WEIGHTED AVERAGE COST OF CAPITAL WEIGHTED AVERAGE COST OF CAPITAL 23
  • WACC (FOR 2005) average price of stock 2005(P) 86.32 dividend paid (D) 2.4 ygrowth (g) 8.68 expected dividend next year D1=D*(1+g) 2.60832 REQUIRED RATE OF RETURN =D1/P+g REQUIRED RATE OF RETURN (%) 8.71 CAPITAL PROPORTION(P CAPITAL Equity Share Capital 82455 0.14193 Ke=14.16 Reserves & Surplus 327622 0.56394 Ke=14.16 Unsecured & Secured Loans 170878 0.29413 Kd=6.59 TOTAL 580955 WACC=P1*Ke+P2*Ke+P3*Kd P*COST OF PROPORTION (P) COST OF CAPITAL CAPITAL P1 0.142 14.16 2.01 P2 0.564 14.16 7.99 P3 0.294 6.59 1.94 WEIGHTED AVERAGE COST OF CAPITAL 11.94 24
  • PROCUREMENT MANAGEMENT AT NTPC LIMITED INTRODUCTION Procurement activities to be taken by NATIONAL THERMAL POWER CORPORATION (NTPC) are to satisfy varying project requirement of equipment, materials and services. Any procurement-requiring adherence to the IDA procurement procedure, long equipment delivery periods, intense engineering co-ordination or specialized engineering knowledge during procurement etc. would be classified as category “A” contracts. All other procurement contracts pertaining to a project will be classified as category “B” contracts. Procurement at NTPC is initiated on the basis of approved indents/requisitions and indicating budget and project estimate provisions. The contract services/materials management services receive the requisition/indent for the procurement of materials/equipment/services duly approved by the competent authority and then plan and organize the procurement action. OBJECTIVE The basic objective of procurement management at NTPC is to make available, the needed equipment, material, works and services in the right quality and quantity, at the right time and at the right price after giving fair and equal chance to tenderers, so as to obtain the optimum value for each unit of expenditure. 25
  • PROCEDURE DOP (DELEGATION OF POWER) All the activities undertaken at NTPC are regulated by a guideline called “DELEGATION OF POWERS” or “DOP” in short. The guideline lays down the responsibility and authority of various level executives in the PSE (Public Sector Enterprises). Based on this guideline the following major procedure’s have been identified. However, procurement of any material for any plant or the office of NTPC is done by two processes. These processes are:- • Procurement through tenders. • Emergent Procurement Though in case of urgency the respective department is allowed to make procurement through cash up to the limit of Rs. 10,000 only. But in case of the normal procurement that is done by tendering, a standard procedure is followed where the intender sends the procurement list to the finance department for the goods valued over Rs. 10,000 for vetting. Once the finance department clears the cost aspect of the tender it is send for the required approval from the competent authority as described in the DOP. After getting the required authorization the indent is forwarded to materials, contracts or HR services as is suitable. From there a tender notice is issued and the procurement process starts. TENDERING PROCEDURE FOLLOWED AT NATIONAL THERMAL POWER CORPORATION LTD. 26
  • (NTPC) PROCEDURE FOR INDENTING: INDENT COST ESTIMATION FINANCE CONTRACT MATERIAL HR 27
  • For the purpose of indenting, material planning is required. It is nothing but classifying the materials into various categories to facilitate a speedy and efficient procurement. In this process all the materials which may be required at any of the NTPC projects or offices are classified in to five major categories and their procurement is to be done on the basis predefined for them. 1.Stock item (Automatic Recoupment items/AR) 2.Insurance Items (I) 3. Unit Replacement item (UR) 4. Capital Item (P) 5 Other non-stock items (Not falling under any of the above category) But since this classification is very vague and unspecific, a further classification is done to exercise selective control over all Material Management activities. This classification is known as the ABC analysis. A- Class items: Items having Annual Consumption over Rs 1 lakhs are classified as class A Items. There are few points worth noting about the indenting process. The estimated value of the indent should be as far as practicable. Basis of estimates should be either on the last purchase price with escalation if any or market trend or on the basis of technical specification e.g. size weight etc. In case of new items detailed justification & working sheet of estimated cost shall be furnished, wherever possible. Similarly in case of proprietary items, PAC/OEM/DES or standardization certificate must be furnished by the competent authority that should be DGM or above. After these details are checked and satisfied, the indent may be registered and further procurement process may be started. B- Class items: Items having Annual Consumption over Rs. 10000/- but less than Rs. 1 lakhs are classified as B class item. C- Class items: Items having annual consumption of less than Rs. 10000/- fall under this category. Cost estimation: Cost estimation process is the most important financial activity in the process of budgeting and procurement. Whenever NTPC procures some material, it is either financed from the budget allocated to the particular department requesting for the material or it will be financed from the central fund. The procurement of the second kind requires financial clearance from the Finance Concurrence department. For the purpose, cost estimate is made before forwarding the indent document to the Finance department. There are various methods of cost estimation, which are used at NTPC. Some of the methods use very technical details and procedures whereas others are simple to implement and uses market rate to prepare a cost estimate. a)Historical Cost Method: In this method of cost estimation. The cost engineering department 28
  • at NTPC uses the latest cost incurred for a similar kind of project. For example, if a cost estimate has to be prepared for· a new Thermal Power Plant, the latest executed Thermal Power Plant rates will be used not any other. Hence the rates thus obtained are very near to the actual that might be prevalent in the market at present. But to smoothen the effect of inflation and various other financial components in the price at the time of the execution of that project, an escalation factor is used. All the prices of previous projects are multiplied by this factor and a very close estimation of market rate is thus obtained. The escalation factor calculation is discussed separately in the report. b) Market Rate Method: Market rate method is used for the procurements that are not in very large numbers and value. In this method once an indent is prepared, some of the vendors registered at NTPC or listed in trade journals are sent a request for quoting the prices of a particular good. This enquiry is not a tender and the rates provided by the vendors are not part of the bid. After the information is received, the rates quoted by various vendors are compared and the lowest quoted price is taken as base rate for calculation. However if the difference in the price quoted by two vendors are reasonably high an average of the two may be taken as the base. However for civil works component of the contract, the wages rates are taken from the government gazettes and similarly for some homogeneous products like cement, steel etc a standard market prevailing rate is used. TENDERING PROCEDURES Purchasing at NTPC is not a very simple process. As we have discussed earlier, the purchasing process is not same for all kind of materials and equipments. The urgently required materials are procured through cash purchase and single tendering, the routine purchase are routed through Material Management Services and are procured by bidding. As we had seen the classification or the materials, the value frequency of purchase decides the mode of procurement. But as a policy, all the items worth more than Rs. I lakhs must be procured through tenders. The materials department or the HR Services department usually initiates the tender process .In case of construction and civil works; the tender is initiated by Contracts Services. Tendering process is the most important activity during the entire acquisition process and hence this is the main focus during the project. Close monitoring of tendering process is required because there are lots of chances or fraud, Mis-representation of facts and various other legal and procedural misrepresentations. To simplify the study of tendering process we have divided the topic in sub- parts, which will he discussed subsequently. But before we go any further we wi1I see a graphical representation of the tendering process. 29
  • Tender Notification Issuance of Tender Document Received Quotation No Has Tender Evoked Response? Yes Award of contract I) TYPE OF TENDERS: Based on the materials classification and DOP, there are three types of tenders l.Open tender: Procurements or value Rs I lakh and above must be done through open tendering. All the plant packages are procured through Open Tender. Open tender is accessible to all known, reliable and proven sources of particular equipment/material. For the purpose, a notice inviting tenders must appear in two or more newspapers of all India repute in addition to one or more local newspaper where the material/equipment is to be delivered. However to avoid frivolous tenders, a pre-qualification procedure may be adopted. this process will take place once in every three years by advertising in two or more newspapers of all India repute in addition to one or more local newspaper where the material/equipment is to be delivered. The criteria for pre-qualification will inter-alia consist of past performance, financial soundness, technical competence, organizational capability etc. But for the items valued less than Rs 1 lakh the pre-qualification can be done on the basis of data available in Trade Journals, Manufacturer's Directory, or approved vendors list of State Government/Central Government/ DGS&D vendors to whom enquiries were floated in past. 2.Limited Tender: Limited tender is a type of tender where instead of sending bid enquiry to all the possible vendors through newspapers, a limited number of vendors arc intimated through 30
  • post or fax. But a Limited Tender may be invited only for the procurements worth less than Rs. 50000/-. In limited tender, a minimum of four bidders are invited to quote the prices for the required equipment/material /services and these four bidders must be from the approved list of vendors mentioned in the open tender. However a Limited Tender is a special case and cannot be issued without proper explanation and requirement. In case of urgency, items worth more than Rs. 50000/- may also be procured with authorization of competent authority and the reason must be recorded in the indent documents. However the next higher authority of the procurement department will decide the number and names of supplier. 3.Single Tender: This type of tendering is the easiest and fastest to acquire a good but requires lot of paper work and authorization before the acquisition can be initiated. These acquisitions take place on the ground of proprietary items or standardization. To initiate a single tender, a Proprietary Article Certificate must be issued by a competent authority and the purchase will not be made without authorization of a Genial Manager or to whom the power is delegated. This type of tendering is monopolistic in nature and is avoided to the extent possible. However Single Tendering is done in many other cases which are not mentioned anywhere in the DOP. 4. E-Procurement at NTPC : E-Procurement is very important to achieve e-governance and for applicability of uniform procurement process to all units. It has ability to reduce procurement cost by reduction in the lead time, reduction in transaction cost and cycle time etc. E-Procurement also help in building collaborative relationship with suppliers. E-Procurement enables greater transparency, it also enables best practices and increase vendor base. E-Procurement also reduce the possibility of cartel formation and generate responsible competition. It also achieves saving in administrative and process cost. E-Procurement enhance the security and it is also a step towards ERP systems for the organization. E-Procurement further promises the following gains to the supplier/ vendor community, • No geographical barriers: Sales/Marketing time reduction , which otherwise is spent on price negotiations, follow up etc., as this will lead to the quicker order finalisation at our end. • Reduction in venders cost as they need not to travel our offices and there is not need to make those umpteen calls (communication cost). • Complete transparency in the process/ the operating community, leading to sound decisions. In pursuance to achieve e-governance, in the recent past Government of India has issued necessary guidelines for implementation of e-business and Government is keen for 31
  • implementation of e-business in all the areas. It has been informed that many of public sector Organisations as well as Government Department have been benefited with E-Procurement. Central Vigilance Commission (CVC) vide office order no 46/9/03 dated 11/09/03 has issued the guidelines for procurement through E-Procurement /Reverse Auction. CONCEPT AND SCOPE: E-Procurement is purchase and sales of supplies and services and management of procurement process over internet. E-Procurement website allow qualified and registered users to look for buyers or sellers for goods and services. E-Procurement is an integrated system and can be adopted uniformly at all the units of NTPC, to help reduce the procurement cost, procurement lead time and shall enhance the increased transparency. POLICY: NTPC is spread over all parts of the country and therefore a uniform system is envisaged which shall be efficient, economic and transparent. The E-Procurement shall be applicable to all the NTPC stations/ Projects / Regions and at Corporate Center. Procurement process shall gradually be taken electronically so that we achieve all possible procurement through electronic media. The present policy is for adaptation of procurement process through electronic media, therefore the existing DOP shall remain same. THIS POLICY IS EFFCTIVE FROM 1-04-2006. TARGETS: Implementation of e-procurement at all stations/regions have been targeted as detailed below: • 60% of e-procurable items by Dec 2006. • 100% of e-procurable items by Dec 2007. E-TENDERING: The concerned executive C&M department shall examine the indent with reference to type of items, complexity, technical specifications and other aspects and may decide for e-tendering. Depending upon the type of items and value etc. It will be decided as single part bidding or double part bidding. SECURITY CONCERN: In order to assure confidentiality, security and authenticity and non- repudiation, following techniques shall be used. Security is not restricted to these but if felt appropriate, at any time, additional features shall be applied. • Public key Infrastructure • Digital Signature • SSL/Passwords • Digital Certificate • Tender preparation & Release….Work flow based • Bid preparation-data resides on server only bidder is able to view • Bid submission-with HASH and Encryption 32
  • • Bid opening- can be viewed only upon Un-encryption PROCESS: The process of e-procurement shall be taken up at Contracts & Materials department after receipt of the requisition or the indent from the user department. The indent duly approved by the competent authority as per DOP, is a pre-requisite to initiate e-procurement actions. The indent complete in all respect along with the all required information, documents, specifications, quality plan shall be forwarded by indentor to Materials department. The main steps involved are: • Mode of tendering • Nomination of tender committee • Defining tender documents • Defining auction rules • Obtaining digital certificates for each T.C member • Generation of passwords • Defining of Server timing of clock • Hosting of tender documents • Release and Uploading of documents • Defining tender schedule • Allowing download of tender documents • Clarification on tender documents on line • On line price bid clarification / Amendments • Preparation of bids on line • Submission of bids online • Up-loading of bids • Submission of EMD-off-line(online possible where e-payment facility is available) • Opening of bids- online (upon applying individual digital certificate and passwords by Tender committee) • Opening of envelope –1..EMD • Opening of envelope –2 ..QR (in case of open tender) • Opening of envelope –3 ..Technical details & data sheets • Opening of envelope –4 …Technical deviation details • Online evaluation of technical bids and QR • Online technical & QR clarifications • Arriving at technical loading off line • In corporation of loading logic 33
  • • Assessment of NEW vendor • Opening of envelope –5 …Price bid schedule • Online generation of comparative statement • Defining Auction Strategy/ date/ Time/Rules • Intimation of Reverse Auction date & time to vendors • Conducting reverse auction • Providing of item wise break up by L1 bidder in the event of composite tender DETAILS OF PILOT PROJECTS ,UNDERTAKEN BY VARIOUS PROJECT: 1.Badarpur Forged steel balls Completed 2. Dadri Laptops & PCs Completed 3.Simhadri Conveyor Belts Under completions 4. Farraka Conveyor Belts Work in Progess VALIDITY OF THE POLICY: This policy document is valid for the period of one year w.e.f 1-04-2006. In the mean time any suggestions / recommendation may be forwarded to corporate materials for review. II) Tender Documents: Every time when an open tender is invited, the bidders are provided with a set of documents, which provides various required information and terms and condition of the contract The documents also contains the various contract forms which the bidder is expected to sign and return to NTPC to acknowledge the acceptance of the terms and condition of the contract. The document also contains the guidelines for bidders for bank guarantee. Earnest money and the like, this document is issued for a cost that is decided on the basis of the total estimated value of the indent the costs of the documents are as follows: COST OF TENDER ESTIMATED VALUE OF INDENT DOCUMENT 1 Up to Rs. 10 lakhs 200 2 Above Rs 10 lakhs and up to 25 lakhs 300 3 Above Rs 25 lakhs and up to Rs 50 lakhs 500 4 Above Rs 50 lakhs and up to Rs 100 lakhs 750 5 Above Rs 100 lakhs and up to Rs 500 lakhs 1500 6 Above Rs 500 lakhs 3000 Every time a new tender is notified, a set of tender documents is issued against a payment of stipulated fee according to the price list given above. This set of tender document consists of many different documents meant for different purposes. The documents may vary from project to project. Here we will see what the documents that are generally issued to bidders are. A)Instruction to Bidder (1TB): This document is meant to provide the bidders the vital 34
  • information required to understand and evaluate the tender offer. The document contains the general instructions like the Terms of Payment, Bid Security, Contract Performance Security, Liquidated Damages, Currencies conversion, Defects Liability and Work Schedule. The document also specifics the Qualifying/Eligibility requirements of the bidder and the goods/services supplied. The ITB also contains information for the foreign bidders. Additionally the ITB contains various references to clauses of GCC (General Condition of Contract) and SCC (Special Condition of Contract). Finally the document specify about the language and interpretation and implied terms and condition of all the documents provided with the bid. ITB also contains information about how to modify and withdraw the bids already submitted to NTPC. Hence in short we can identify this document as the guidelines and information brochure to bidders before they submit their quotation for the notified work. B)Bid Proposal Sheet or Bid Data Sheet: Bid proposal sheet is a set of documents, which contains the formats for bidding, Summary price proposal, Break up of Bid. Price, Equipment wise price break-up, civil works price break-up, commercial deviation, Technical deviations, Guarantee declaration, Price Adjustment data, Price break up of recommended spares, Construction Equipments, Special Maintenance Tools, QR Data and capacity data, Work completion Schedule, Declaration of Import content, Check list, Information regarding value addition and Type test charges. This document is nothing but a standard format providing the bidder to -Furnish the details required by the NTPC in a standard format used at NTPC. c)General condition of Contract: The document titled General Condition of Contract of GCC is a document that takes care of the legal aspect of the contract between the bidder and NTPC. This document also is an integral part of all the bid documents with some minor changes or no changes at all. The document starts with the definition for The terms used in various tender documents. This is worth noting that all the terms used in the bid document are predefined and have one and only meaning which is defined in the GCC. The document also contains different formulae that are to be used on some future dates to calculate the LD or the Price Escalation. Finally the document also refers to the unforeseen events like Out Break of a War, Bankruptcy of the contractor or any other Force Majeure. The GCC also has a clause called RESOLUTION OF DISPUTES that specifies the procedures to be followed if any dispute occurs, arising out of or in connection with the Contract. D)Special Conditions of Contract: Special Condition of Contract or SCC is not a standard document that is issued with all the tender documents. The document takes care of the special issues that have come up or may come up in the course of the execution of that particular contract and has not been covered in the General Condition of Contract. The very first clause of the document is TIME-THE ESSENCE OF CONTRACT. The document also talks about the detailed Manufacturing plan and Master Schedule of the execution of the contract. It is the SCC where we mention the issues related to Liquidated Damage Clause. 35
  • This is mentioned in the document itself that "The following Special Condition (if Contract shall supplement the General Condition of Contract. Wherever there is a conflict. The provisions herein shall prevail over those in the General Conditions of contract. Hence the document may also be considered as the amendments to the GCC. E)Erection Condition of Contract: This document again is specific document which may not be issued with all the tenders. As the name itself suggests. The document deals with the erection component of the contract (if any). In the document some particular issues pertaining to the erection component of the contract is dealt with. Typically, an Erection Condition of Contract deals with the civil construction works undertaken at the site where the equipment is to be installed and commissioned. This also takes into consideration the statutory and local authority who may be in charge of monitoring the work in progress and whose permission may be required. Hence this document is a must for all the work where there is an erection component. F)Technical Specification: The document is the thickest document or any bid document. This document contains all the specification required for that particular project. The document is prepared by the Project Engineering department and contains the technical specifications of the equipments and spares to be procured. It may also contain the drawings of the equipment or layout of the project. Similarly the document will also enlist all other possible alternatives to the already mentioned specifications (if any). Since there are no financial aspects associated with this document, a detailed study of this document is out of the scope of this report. III) Tender Committee: As we have mentioned earlier, Delegation of Power has a very important role to play in purchasing process At NTPC. For every purchase value of exceeding Rs 50000/-. The committee consists of three members, one representative each from the Indenting department, Materials Department and Finance (Concurrence). The representatives are nominated by competent authority varying from Senior Manager to DGM depending upon the value of the contract. This committee will take into consideration every possible aspect of the terms and conditions, prices, inspection procedures, phasing delivery if required etc. This committee also formulates the QR (Qualifying Requirements) for the bidders of that particular tender. . IV) Tender opening: Tender opening is the penultimate step in the purchasing process. Tenders are opened on the due date and time mentioned in the tender notification without fail. If the data mentioned is declared holiday, the next working day will be considered as the opening date but the time will remain the same. The sealed envelopes containing the bid will be opened by the purchase and finance executives nominated by their Head of the Department. The representatives 36
  • of the bidders may also present themselves if they wish so however their absence will not hinder the process. The name and rates quoted by all the present bidders will be read out and any omission or irregularity will be pointed out on the spot. Alterations or erasures (if any) will be initiated by the officers present at the time or the opening of the tenders. All the quoted figures should also be encircled and will be written in words if the bidder have not done so already and will be attested. Total number of erasures and correction will also be written and attested. These all activities are done to ensure proper and transparent procurement process. V) Late and Delayed Tender: Though the last dates for receipt of tender and tender opening dates are mentioned in the bid invitation notice and all the bidders are expected to adhere to them, some times some tender documents posted by the bidders get delayed in the post and reach the NTPC office later than the date specified in the tender invitation notice. It can be caused by several reasons within bidder's control or out of one's control. All such tenders are classified into two categories, Late Tenders and Delayed Tenders. a) Late tender: The tenders that have been posted on or after the due date and received subsequently are considered to be Late Tenders. Similarly all the tenders posted through courier before the due date but received after the due date is also considered to be Late Tenders. As a policy All the Late Tenders are rejected out right. b) Delayed tender: When a tender document is posted before the due date but is received after the due date. For such tenders which are posted through Registered Post/Speed Post before the due date and is received within 6 working days of bids due date may be opened and considered with the approval of competent authority. But this consideration has a condition that the date of posting of the bids documents must be clearly visible On the postal stamp on the envelope containing the documents. Tender those is posted by ordinary post and are received after the due date and time will not be opened and will be returned to the party after finalization of bid except in case where:- . 1) The number of acceptance offers is less than three 2) Lowest and acceptable tender is unreasonably high when compared with Lowest Purchase Price. 3) Artificial manipulation of rates by forming a ring is suspected. 4) All the tenderers are providing the make of only one manufacturer. 5) If a substantial savings in foreign exchange is possible. 37
  • VI) Negotiation: When adequate competition exists, the negotiation should and must be avoided. This competition may be in form of many manufacturers making the same good or a single manufacturer providing the goods through many retailers/suppliers and all the retailers/suppliers are free to quote individually. However if it's found that the price quoted by all individual bidders are unreasonably high in comparison to the last purchase price/estimate or in case of some ambiguous technical/commercial terms and conditions, negotiations can be done with the approval of competent authority as per DOP. In normal circumstances, the negotiation should take place with the technically and commercially evaluated lowest (Lt) vendor only. However, depending upon the situation the negotiation may be carried out with more than one party at a time. Normally the negotiation is carried out by the TC (Tender Committee). But in case a tender committee is absent i.e. no committee was formed to monitor the procurement, representatives from finance and purchase may complete the task of negotiation. However, negotiation process is not always for negotiating the prices of equipment/material/services supplied but it may also involve terms and conditions of supply, future commitments for supply of spare parts and consumables and many other aspect of the contract. For example a lowest price bidder may not get the contract if it’s found that another bidder who is quoting higher than him but is offering lower priced spares. Hence in this case a negotiation may be conducted with the L 1 to make him offer the spares at the same rate as being offered by his competitor. Once the negotiation process is finished and the two parties involved in the negotiation reach a consensus, the committee's purchase proposal/recommendation will be put up to the competent authority for approval and subsequently the letter of intent may be faxed to the party. 6) Security Deposits: A refundable security deposit may be asked at the time of submission of the bid. This deposit is taken to ensure that the vendor who is awarded the contract will not refuse to undertake the contract. If the bidder after successful bid refuses to undertake the contract, the earnest money deposited by him will be forfeited. However there arc various instances where this deposit may be waived off. For example for all the purchases valued less than Rs 50000/- the EMD may be waived off. Similarly for the PSUs, NSICs and SSI parties, the EMD can be waived also. On successful completion of bidding the earnest money may either be returned to the bidder or may be adjusted towards the security deposit to be provided by the bidder. Another major deposit is in form of performance guarantee or Liquidity damage (LD) the equipments provided by the vendor fail to perform as per the specification, the cost for this shortfall may be recovered from the vendor. This guarantee is generally 10% of the awarded value and is generally in form of bank guarantee. However in cases of procurement from OEM/OES or proprietary· vendor the same may be waived depending upon the merit of case. However in case of procurement of equipment/material/services there is a contract for providing spares for the next three years. In case the prices of these spare parts goes up in the future and the vendor refuses to supply the spares at the same rate this guarantee deposit will be forfeited. As a matter of fact, this guarantee is taken just to make sure that the contractor 38
  • does not refuse to honor the contract in future after he realizes that the prices have gone up or for some similar reasons. Post Purchase Activities: Vendor Evaluation: Once a vendor has supplied some material to NTPC, the vendor is registered with the NTPC and it is given a performance rating which may be used in future to award of contracts in case of limited tender and single tender. This rating system is not very complex but some formulae are used: Parameter Measure Weightage A) Quality Performance Rejection 4 B) Delivery Performance Ratio of contracted delivery to actual delivery 1. Time schedule Delivery in weeks 2 2. Quantity schedule delivery Deviation in qty. 2 Pre-post award C) Commercial and contractual performance 2 Per formance Calculation of vendor ratings will be done as follows: Rejected Quantity a) Quality performance = 1 - * weightage Supplied Quantity Contract delivery in week b) 1. Time Schedule =1 - * Weightage Actual delivery in week QTY received (acceptable) 2. Quantity Schedule = * weightage QTY. ordered 39
  • Parameter Min % Score Quality 70% Delivery 50% Commercial Contractual Terms 50% On the basis of points scored against each parameter categorization of vendor shall be done as follows: Vendor Rating Point Score a) Outstanding 8 and above b) Very Good/Good 6-8 c) Unacceptable less than 6 Indices of performance A)Adherence to lead-time: Against each purchase order the supplies arc to be affected as per the declared lead-time with a cushion+I0%. In case the actual lead-time differs by more than +10% from the declared lead-time then the total lead time slippage shall be taken into account for rating calculation. Declared Lead Time Slippage RATING = Declared Lead -Time B)Extent of Rejection: Supplier as per specification and without rejection should be the aim of all the purchase executives. But at times the rejection is possible due to non – 40
  • conformance of the specification or performance slippage. Hence a rating system is developed to take care of that Value of Material Supplied – Value of Material Rejected RATING = Value of Material Supplied B) Budget Compliance: The responsibility of each purchase personnel is to keep the procurement within the allocated budget. The additional responsibility is in form of maintaining the quality also at the same time. The rating for budget compliance will be done as follows: Budget allocated– Excess over budget RATING = Budget Allocation And the overall rating will be done on following basis: Sum of above rating X 100 OVERALL RATING = 3 41
  • A. INTRODUCTION Source of Funds National Thermal Power Corporation Ltd. (herein after called 'NTPC' or 'Employer) intends to finance the Package named in the Bid Data Sheet (BDS), through external commercial borrowings, internal and other sources. 42
  • NTPC intends to make financing arrangements for the subject package by means of Buyers Credit from International Banks through the Export Credit Agencies of the country concerned to the extent the goods and services covered in the package are imported from OECO countries. For the above purpose the Export Credit Agencies require certain. Procedure formalities to be completed by the equipment supplier of their country. The bidder shall, in case of award of contract, facilitate completion of such formalities as may be required by the respective export credit agency to enable NTPC to avail Buyers Credit for funding eligible goods and services covered in the package. The aforesaid option of funding is also intended to be availed by NTPC for supply of goods and services from OECD countries by the sub-vendors/sub-contractor of the bidder. The bidder shall make similar compliance in respect of its sub-vendors/ sub- contractors to the extent the goods are imported from concerned OECD country ELIGIBLE PLANT, EQUIPMENT AND SERVICES For the purposes of these bidding documents, the word "facilities" means the plant and equipment to be supplied and installed, together with the services to be carried out by the contractor under the contract. The words "plant and equipment,” "installation services," etc., shall be construed in accordance with the respective definitions given to them in the General Conditions of Contract. All countries and areas are the eligible source countries for goods and services to be supplied under this contract and accordingly goods and services to be supplied under this contract may have their origin in any country and area For purposes of this clause, "origin" means the place where the plant and equipment or component parts thereof are mined, grown, or produced. Plant and equipment are produced when, through manufacturing, processing or substantial and major assembling of components, a commercially recognized product results that is substantially different in basic characteristics or in purpose or utility from its components. The origin of the plant, equipment and services is distinct from the nationality of the Bidder. BID PRICES Unless otherwise specified in the Technical Specifications. Bidders shall quote for the entire facilities on a "single responsibility" basis such that the total bid price covers all the Contractor's obligations mentioned in or to be reasonably inferred from the bidding documents in respect of the design, manufacture, including procurement and subcontracting (if any), delivery, construction, installation and Completion of the facilities including supply of mandatory spares (if any). This includes all requirements under the Contractor's responsibilities for testing, pre-commissioning and commissioning of the facilities and, where so required by the bidding documents, the 43
  • acquisition of all permits, approvals and licenses, etc.; the operation, maintenance and training services and such other items and services as may be specified in the bidding documents, all in accordance with the requirements of the General Conditions of Contract and Technical Specification. Bidders are required to quote the price for the commercial, contractual and technical obligations outlined in the bidding documents. If a Bidder wishes to make a deviation to the provisions of the bidding documents save those listed, such deviations shall be listed in Attachment 6 of its bid. Bidders shall give a breakdown of the prices in the manner and detail called for in the Price Schedules. The Bidders shall present their prices in the following manner: Separate numbered Schedules shall be used for each of the following elements. The total amount from each Schedule (1 to 4) shall be summarized in a Grand Summary (Schedule 5) giving the total bid price (s} to be entered in the Bid Form. Schedule No. 1 Plant· and Equipment including Type Tests charges and Mandatory Spare Parts supplied from Abroad Schedule No. 2 Plant and Equipment including Type Tests charges and Mandatory Spare Parts to be manufactured within Employer's Country Schedule No. 3 Local Transportation including port handling, port clearance, port charges, Inland transit Insurance and other local cost incidental to delivery of Plant & Equipment and Mandatory Spares Schedule No. 4 Installation Services including Erection Works, insurance covers other than inland transit insurance and other services as specified in the bidding document Schedule No. 5 Grand Summary (Schedules Nos. 1 to 4) Schedule No. 6 Recommended Spare Parts 44
  • Schedule No. 7 Taxes and Duties not included in Bid Price Schedule No. 8A Break up of type test charges quoted in Schedule -1 Schedule No. 8B Break up of type test charges quoted in Schedule -2. BID SECURITY The bidder shall furnish, as part of its bid, a bid security in a separate sea/ed envelope in the amount and currency as stipulated in the Bid Data Sheet The bid security shall, at the Bidder's option, be in the form of a Banker's cheque irrevocable letter of credit or a bank guarantee. , In case of domestic bidders the Bank Guarantee shall be from- a Bank as specified in the Bid Data Sheets. In case of foreign bidders, the Bank Guarantee can be from any other bank also in addition to the banks specified in Bid Data Sheet and if the Bank Guarantee is from a Bank not specified in the Bid Data Sheet, then the Bank Guarantee shall be confined by any such Bank as specified in the Bid Data Sheet. The format of the bank guarantee or letter of credit shall be in accordance with the' form of bid security included in the bidding documents. Bid security shall remain valid for a period of forty five (45) days. The bid security shall be furnished in a separate sealed envelope. Any bid not accompanied by an acceptable bid security, in a separate sealed envelope, shall be rejected by the Employer as being non-responsive and returned to the Bidder without being opened. The bid security of a joint venture must be in the name of all the partners in the joint venture submitting the bid. The bid securities of unsuccessful bidders will be returned as promptly as possible, but not later than twenty-eight (28) days after the expiration of the bid Validity period. THE BID SECURITY MAY BE FORFEITED (a) If the Bidder withdraws its bid during the period of bid validity specified by the Bidder in the Bid Form (b) If the Bidder does not accept the correction of its Bid Price pursuant (c) If the Bidder does not withdraw any deviations listed in Anachment-6 at the cost of withdrawal indicated by him 45
  • (d) If the Bidder refuses to withdraw, without any cost to the Employer, Any deviation not listed in Attachment 6 but found else...where in the bid. In case of successful bidder, if the bidder fails within the specified time limit To sign the contract agreement, in accordance with ITB. To furnish the required performance security in accordance with ITB. CONVERSION TO SINGLE CURRENCY To facilitate evaluation and comparison, the Employer will convert all bid prices expressed in the amounts in various currencies in which the bid price is payable to a single currency. The currency selected for converting bid prices to a common base for the purpose of evaluation, along with the source and date of the exchange rate. TECHNICAL EVALUATION The Employer will carry out a detailed evaluation of the bids previously determined to be substantially responsive in order to determine whether the technical aspects are in accordance with the requirements set forth in the bidding documents. In order to reach such a determination, the Employer will examine and compare the technical aspects of the bids on the basis of the information supplied by the bidders, taking into account the following factors: a) Overall completeness and compliance with the Technical Specifications And Drawings; deviations from the Technical Specifications as identified in Attachment 6 to the bid; suitability of the facilities offered in relation to the environmental and climatic conditions prevailing at the site; and quality, function and operation of any process control concept included in the bid. The bid that does not meet minimum acceptable standards of completeness, consistency and detail will be rejected for non-responsiveness. Achievement of specified performance criteria by the facilities (c) Type, quantity and long-term availability of mandatory and recommended Spare parts and maintenance services. (d) Any other relevant factors, if any, listed in the Bid Data Sheet, or that the Employer deems necessary or prudent to take into consideration. COMMERCIAL EVALUATION 46
  • The comparison shall be of the EXW price of domestically manufactured plant and equipment including Type Test charges and mandatory spares (within the Employer's country), such price to include all costs as well as duties and taxes paid or payable on components and raw materials incorporated or to be incorporated in the plant and equipment including mandatory spares plus the CIF (Indian port-of-entry) price of the plant and equipment including Type Test charges and mandatory spares named port of destination offered from outside the Employer's country, plus the cost of local transportation, insurance covers, installation and other services required under the contract. The Employer's comparison will also include the costs resulting from application of the evaluation procedures .However, the Price of recommended spare parts quoted in Price Schedule No. 6 shall not be considered for evaluation of Bids. The Employer's evaluation of a bid will take into account, in addition to the bid prices indicated in Price Schedules Nos.1 through 4 (with summary in Schedule No.5) along with the corrections pursuant to ITB , the following costs and factors that will be added to each Bidder's bid price in the evaluation using pricing information available to the Employer (a) The cost of all quantifiable deviations and omissions from contractual and commercial conditions and the Technical Specifications as identified in Attachment 6 to the Bid. (b) Compliance with the time schedule to the Form of Contract Agreement and evidenced as needed in a milestone schedule provided in the bid (c) The functional guarantees of the facilities offered. (d) The extra cost of work, services, facilities etc., required to be provided by the Employer or third parties. (e) Price Preference. FUNCTIONAL GUARANTEES OF THE FACILITIES (1) Bidders shall state the functional guarantees (e.g. performance, Efficiency, consumption) of the proposed facilities in response to the Technical Specifications. In case a minimum (or a maximum, as the case may be) level of functional guarantees is specified in the Technical Specifications for the bids to be considered responsive, bids offering plant and equipment with such functional guarantees less (or more) than the minimum (or maximum) specified shall be rejected. 2) For the purpose of evaluation, the adjustment specified in the Bid Data Sheet will be added to the bid price for each drop (or excess) in the responsive functional guarantees offered by the 47
  • Bidder, below (or above) either a norm of 100 or the value committed in the responsive bid with the most performing functional guarantees, as specified in the Bid Data Sheet. The Adjustment Factors shall be converted to such currency as specified in Bid Data Sheet. PRICE PREFERENCE Any adjustments in price that result from the above procedures shall be added, for purposes of comparative evaluation only, to arrive at an "Evaluated Bid Price." Bid prices quoted by Bidders shall remain unaltered. The method of evaluation is illustrated below ILLUSTRATIVE METHOD OF EVALUATION Quoted Bid Price without taxes & Duties (after considering Arithmetical errors) ClF price including Type Test charges N1 + Inland transportation including inland transit Insurance for equipment and mandatory spares (b) Ex-works price including Type Test charges + in- N2 land transportation including inland transit insurance for equipment and mandatory spares (c) Price for Installation Services N3 (d) Total price N=N1+N2+N3 Cost compensation - Technical R 48
  • Cost compensation - Commercial T 4 Deficiency in mandatory spares V 5 Adjustment works of Functional Guarantee X 6 Additional work of employer Z1 7 Price preference PP= 0.15 x CIF CIF value of import content of ex-work price quoted in schedule -2, shall be the value of import content declared by Bidder in Attachment -9 to bid in respect of plant and equipment including mandatory spares to be manufactured or fabricated within the Employer’s country and quoted on Ex-works (India) basis. 8 Evaluated Bid Price EP1= (N+R+T+V+X+Z1+PP) PRICE PREFERENCE For granting price preference, the bid price of all bidders shall be increased by fifteen percent (15%) of the CIF component contained in the bid. Bidders seeking qualification on the basis of collaboration with manufacturer(s) of particular equipment (s) are required to quote the price of such equipment(s) including spares on CIF (Indian port-of-entry) basis, if the items are to be imported by the manufacturer or the bidder. In case, such equipment and spares are not quoted by the bidder on ClF basis, then Employer shall assess the CIF (Indian port-of-entry) price of such equipment and mandatory spares for the purpose of evaluation and the total bid price will be increased by 15% of such assessed CIF price also for the purpose of granting price preference. PERFORMANCE SECURITY Within twenty-eight (28) days after receipt of the notification of award, the successful Bidder shall furnish. The performance security for ten percent 10% of the Contract Price and in the form provided in the section -Forms and Procedures of the bidding documents or in another form acceptable to the Employer. 49
  • In case Joint Deed(s) of Undertaking by the Contractor along with his associate(s)/collaborator(s) form part of the Contract, then, unconditional Bank Guarantee(s) from such associate(s)/collaborator(s) for amount(s) specified in Sid Data Sheets shall be furnished within twenty eight (28) days after Notification of Award. These Bank Guarantees shall be furnished in the form provided in the section "Forms and Procedures· of the bidding documents and shall be valid till such period as specified in the corresponding format for Deed of Joint Undertaking. In case of a successful foreign bidder, if the Employer accepts to enter into the Second Contract and I or Third Contract with the Assignee, pursuant to ITS Sub-Clause 28.4 above, then, within twenty eight (28) days after Notification of Award, assignee shall furnish additional performance security for ten percent (10%) of the value of the Contract entered into with assignee and the form provided in the section "Forms and Procedures· of the bidding documents. 5. SPARE PARTS PROCUREMENT Most or the NTPC procurements are related to equipment. On an average the average economic life of a NTPC owned plant is considered to be 25 years and depreciation is taken into account considering these 25 years. Hence during the life lime of the equipment it will definitely require spares as well as some consumables. Hence NTPC has incorporated a clause in the Bid Documents issued to the bidders called SPARE PARTS. This clause has three sub clauses that take care of different types of spare pans required during the lifetime of the plant If NTPC finds -that certain spare parts are mandatory for the plant operation, it specifies so in the Technical specification. In such cases, the item wise price breakdown of such spares on a ClF (India Port)/Ex Work's (India) basis is to be included in the bid by the bidder. However these prices will be free form escalation and should be indicated separately. The prices of spare parts shall also come into picture while evaluating the bid. During the six months starting from signing the contract, NTPC will have the right to increase or decrease the number of spare parts to be procured. In addition, the bidder may by his own experience provide a complete list of recommended spare parts for an operational period of three (3) years for the equipment supplied. "The list should be complete providing the details of how many of the suggested spare parts are present in the equipment supplied as well as their expected operational life. The bidder shall further indicate item wise price break-up on for site basis. The prices quoted in the list shall be valid without any escalation for a period of not less than six (6) months after the placement of order for Power Plant Turnkey Equipment Basis. But this additional recommended spare parts list will not be taken into consideration while evaluating the bid. However a specific clause in the General Condition of Contract makes the supplier provide a list of addresses of all the sub- supplier who provide the spare parts. The clause is "The Contractor will provide the Owner with all the addresses and particulars of his sub-suppliers while placing the order on vendors for items/ components/equipment covered under the Contract and will further ensure with his vendors that 50
  • the owner, if so desires, will have the right to place orders for spares directly on them on mutually agreed terms based on offers of such vendors. In addition, to cater to any exigency arising during the start-up and initial Operation stages up to the satisfactory completion of Trial Operations due to enfant mortality of items/components/consumable hardware, the bidder shall at his own cost shall arrange and maintain an inventory of such items so as not to have any major interruptions during the period from start up to Trial Operations. PROCUREMENT OF FOREIGN SPARE PARTS Many of the plants of NTPC are manufactured by foreign manufacturer. Hence during the lifetime of the equipment, it may require many spares parts and consumables. But to acquire these spare parts .there is no specific method followed by NTPC. However in such a case the list of authorized agents of manufacturer producing the parts is obtained from the manufacturer itself. If the listed dealer is only supplier of manufacturer, the procurement is made through single tender .Else a normal procurement procedure is followed. For example a plant monitoring equipment was in need of batteries and a connecting cable. Both the items were proprietary in nature and the firm had only one authorized dealer providing the required material. Hence the dealer was issued a single tender for supplying the required spares. Similarly in case of a Diesel Generator Set which was manufactured by a US firm had only one authorized service provider in the locality and hence a price list for the components used in the DG Set was acquired from the manufacturer and the contract was awarded to the sole service provider. In case of bigger value spare parts a three year supply of the spare parts is guaranteed by the supplier at the time of supplying the equipment and for further requirement of the spares the vendor may be contacted or a global tender may be issued high value spares not manufactured by any Indian firm or being imported by an Indian firm. However the payments for both the types of spares will be made in following manner, Upon dispatch and against invoices and shipping documents :75% On receipt and storage at Site on physical verification by the engineer: 25% 6. PAYMENTS: Payment is the most important term for any contract. Hence the General Condition of Contract deals the terms of payment. There arc various sub clauses to this clause. The first clause deals with the currency of payment. The clause specifically mentions that “the Contract Price shall be paid in the currency or currencies in which the various price components have been stated and as incorporated in the Contract”. Once the currency is settled and accepted by both parties, the due date for the payment must be decided in advance. The payment is generally made in parts. Once the contract is awarded, an Initial Advance payment is made to the Contractor and afterwards 51
  • payments against dispatch, progressive completion of works and then a final payment is made to the contractor. Whenever a payment has to be made it is divided into two parts (if applicable), the Indian Rupee component and foreign currency component. The due date for initial foreign currency component for the advance payment is 60 days from the award of the contract and 30 days for the Indian rupee component. The Initial Advance payment is done automatically however the payments against dispatch and payments against partial work completion are made after the contractor applies for it. Once the contractor applies for payments, the validity of the application is checked and the invoices or completion report by the engineer is sought. This report is known as Interim Payment Certificate and it certifies the value of the contract executed till the date of completion. However if any part of the work completed docs not comply with the Contract or has been done prematurely according to the master schedule provided at the time of the contract, the NTPC shall not pay for that part of the work. MODE OF PAYMENT: All the payment on the dispatch will be made in form of Letter Of Credit (L/C) in favor of the contractor. The issue of Letter of Credit shall be valid for a period of three months from the date of issue. The utilization of this L/C however is sole responsibility of the contractor. Once the good is received at the site and possession is taken by NTPC only then the payment will be made to contractor’s Banker through Owner’s bank. The payment for advance, Taxes and duties inland transportation, insurance and erection portion of works and Type test charges (if any) will be directly made to contractor. PART PAYMENT: - When NTPC agrees to pay the contractor in part with each additional phase of plant completion, or each new lot of equipments/ material received follows a payment schedule and regulation to make the payment. This schedule is arrived at by analyzing the various component required in the delivery of the equipment / material received or dispatched or it may issue at advance made to contractors supplies for the procurement of the equipment/material. For analysis purpose we have taken the schedule that has been used for TANDA Thermal Power Station. NATURE OF % OF TOTAL EX- % OF EX-WORK CONDITION OF PAYMENT WORK PRICE OF PRICE ON PRO- PAYMENT EQUIPMENT RATA BASIS 52
  • a) Initial Advance 10% ------------------- In ref. to GCC b) Pro-rata payment against dispatches ------------------ 60% On producing invoice and satisfactory c) Pro-rata payment on evidence. item received -------------------- 20% Physical variation & certificate by Engineer of test d) On successful results. completion of performance and guarantee test 10% ------------------- 7. ESCALATION FACTORS: Escalation factors or Contract Price Adjustment is an Endeavor to protect the interest of the contractor as well as that of NTPC. The escalation factor is a derived value by which the prices of materials vary or may vary on some date in future. The clause is a very detailed. Clause and covers every aspect of the price. For the price adjustment purposes, only following components will be considered. Ex-factory price for the equipment / material for the Indian origin and FOB price component for the equipment / material of non-Indian origin (excluding spares) subject to ceiling of 20%. In case of Indian contractor, for any equipment / material etc. imported by him for the purpose of performance of the contract, which is dispatched directly from the port of disembarkation to the site the words “ ex-factory price” shall be deemed to mean the price of equipment / material as it is dispatched from the port of disembarkation to the project site. 2 ERECTION COMPONENT For the escalation of price in case of equipment / material, all the ex-factory prices will be fragmented as Fixed Portion of price and the variable portion of the price .The variable portion of price, assume to fluctuate with the changing labor and material indices. The indices are obtained from the list of industrial Indices published by the Ministry of Industries, Ministry of Labor and 53
  • the Office of the Economic Adviser, Govt. of India. Labour Bureau, Simla, publishes the labour index or Consumer Price Index for Industrial Workers whereas the Economic Adviser of the Govt. of India publishes the Material Index, or Index no of wholesale price under group "All Commodities". 8. ARBITRATION Despite all the care taken and all the irregularities avoided there are times when the relationship between the supplier and purchaser becomes bitter. In that case to avoid any legal complications a set of arbitration rules are laid down and agreed upon in advance. These rules are indisputable and are accepted by both the parties. Some of the important arbitration clauses are mentioned here. 1) In the event of any query, dispute or difference whatsoever arising under this contract or in connection with any question relating to existence, meaning and interpretation of [his contract or any alleged breach thereof, the same will be referred to the sole arbitrator of the General Manager of the NTPC or to a person appointed by him for the purpose. The arbitration shall be conducted in accordance will the provisions of Indian Arbitration Reconciliation Act, 1996 2) It will be no objection that the Arbitrator is an interested person and/or that he had to deal with the matters to which the contract relates and/or in the course of his duties he expressed any view on any mutter in dispute. The award of arbitrator shall be final and binding. 3) In the event of Arbitrator dying, neglecting, resigning or being unable to act for any reason or his award being set aside by the court for any reason, it will lawful for the General Manager of the NTPC to appoint another Arbitrator in place of the outgoing Arbitrator. 4) It is further terms of this agreement that no person other than the person shall act as an Arbitrator and that, if for any reason that is not possible, the matter should not be referred to arbitration at all. 5) The Arbitrator may from time to time, with the consent of nil parties enlarge the time ill making the award. 6) The cost incidental to the arbitration shall be at the discretion of the Arbitrator; the arbitration shall be conducted in NEW DELHI or at such other places where arbitrator may decide. 7) Not withstanding any dispute between the parties Supplier shall not be entitled to withhold delay or defer his obligation under the contract and same shall be carried out strictly in accordance with terms and condition of contract. 54
  • 8) In the event of dispute or difference arising between parties the public sector enterprise and Government, the provision of BPE office memorandum No BPE/GL001/76/MAN/2110-75-BPE (GML-1) dated 1st January 1976 shall be applicable. Conclusion Purchase management activities at NTPC are one of the most vital activities undertaken by the Rs.18000 Cr power giant of India. The process followed by NTPC is very objective in nature and employs a very short term relationship with its supplier. The system tries to take advantage of the competition in the field of heavy engineering where foreign manufacturers like MHI, GE etc. are competing with Indian manufacturers like BHEL and L&T. NTPC being a public sector company, to be free from nepotism and favouritism has adopted a system where transparency and automation is at its utmost level. Transparency was achieved by a multi member team and sealed tenders where no one knows in advance the quotation offered by a particular bidder. Automation here signifies that almost all the contracts are awarded following the same procedures, by awarding the contract to the lowest bidder that is L1 without much consideration. Together they constitute a very reliable and corruption free system. At times it seems that the system is capable of saving lots of money of NTPC but in most of the cases the cost of maintaining the system itself combined with the poor responsiveness amounts to a lower level of efficiency. In today’s world of cutthroat competition only those firm are going to survive who are committed to efficiency, as it were their core competency. Cost must be reduced by means of optimum utilisation of resources and channelled into more profitable 55
  • segments. It is an established fact that on operational level NTPC is one of the world’s most efficiently run organisation. Benefits can not be evaluated in isolation as there are certain features very unique to the kind of domain NTPC is into. As we have discussed earlier that most of the item except coal and gas have a very infrequent and unpredictable demand. This means that NTPC can not anticipate its demand in advance and hence going into a long term supply contract is very difficult. For some procurement which actually constitutes more than 70% of non fuel procurement, the items are manufactured to order. In these cases even the manufacturer is not sure of the future price and availability of the equipment and hence going into a long-term contract based on current prices may do more harm than benefits. Another factor which must be understood is that there are very few companies which are into manufacturing of the kind of equipments or material required by NTPC. And since the fixed capital employed by these firms are huge, many a times they offer huge discounts just to acquire a particular order so that they can fulfil some of their targets. NTPC has witnessed one such offer in past where a substantial discount was offered by a vendor on the condition that the contract should be awarded to him in a specific time period mentioned by the manufacturer. These benefits could not have been availed by NTPC had it been in a long-term relationship with a particular manufacturer. References: 1. Purchase Management System Manuel, 2nd Edition, NTPC, New Delhi. 2. Delegation of Power Handbook, NTPC, New Delhi. 3. ANNUAL REPORT OF NTPC. 56
  • 4. www.ntpc.co.in 5. www.power.alstom.com 6.www.ntpceoc.com 7.www.powermin.nic.in 8.www.edf.fr 57