Seeing a sellout

The CAG report has raised valid concerns about pricing public resources such as minerals in an efficient and transparent manner.

THE Comptroller and Auditor General of India (CAG), the financial oversight body, has fluttered the dovecotes of the polity with its staidly titled report, Allocation of Coal Blocks and Augmentation of Coal Production. The report, which was tabled in Parliament on August 17, exposed the chinks in the armour of the United Progressive Alliance (UPA) government, with the main opposition party, the Bharatiya Janata Party (BJP), going for the jugular and demanding the resignation of Prime Minister Manmohan Singh. If allegations relating to the allocation of telecom spectrum under 2G licences with a presumptive loss of crores of rupees to the national exchequer, as unmasked by the CAG, upset the proceedings of the entire winter session of Parliament in 2011, the latest CAG report on the alleged wrongdoings in the allocation of coal blocks threatens to make the monsoon session a washout as no truce between the major warring parties is in sight.

The blackout suffered by the entire northern, eastern and north-eastern regions twice in July partly stemmed from the inadequate production of fuel, particularly coal. This is unsurprising because as much as 66 per cent of the countrys power production capacity is driven by coal. The country is endowed with one of the largest global coal reserves (geologically reckoned at 2,85,863 million tonnes), but its power plants are often faced with inadequate supply of coal. Most of them operate at 70 to 80 per cent of the maximum capacity. The monopoly producer, Coal India Limited (CIL), which produces 81 per cent of the coal and purveys 82 per cent of its production to the thermal power plants across the country, is not able to cope with the escalating demand from mainstream infrastructure industries such as power and steel.

The CAG report observed that the rate of increase in the production by CIL during the Eleventh Plan (2007-12) had remained far below the target envisaged by the Planning Commission. The low rate of production was the result of inadequate drilling capacities, backlog in overburden removal, mismatch between excavation and transportation capacities, and low availability and underutilisation of heavy earth moving machinery. As CIL was not able to augment output to meet the burgeoning demand for coal from core infrastructure sectors, captive coal mining was given primacy to spur private sector participation in coal mining. Accordingly, allocation of coal blocks to private companies for captive use started in 1993, after the Coal Mines (Nationalisation) Act, 1973, was amended.

With its avowed objective to provide power to all by 2012, the government allocated 194 (net) coal blocks with aggregate geological reserves of 44,440 million tonnes to government and private parties as on March 31, 2011. The nub of the strictures made by the CAG centres around the allocation process and how it was used to enrich a handful of private players who successfully bid for the blocks. At the outset, the audit conceded that it had attempted to estimate the financial impact of the benefit to the coal block allottees, restricting itself to private parties. Out of the 75 private allottees, 57 were allotted blocks with open cast/mixed mines.

The report recalled that the concept of allocation of captive coal blocks through competitive bidding was made public by the Coal Ministry at an interactive meeting held with the stakeholders on June 28, 2004. Following this, an elaborate note on the subject was forwarded to the Minister of State for Coal and Mines in July 2004 by the then Coal Secretary. It highlighted the point that since there is a substantial difference between price of coal supplied by Coal India and coal produced through captive mining, there is a windfall gain to the person who is allotted a captive block.

Hence, the Ministry felt it was absolutely necessary to adopt a selection process that was demonstrably more transparent and objective. Auctioning of blocks, which was transparent and objective, was deemed to be one of the widely practised and acceptable selection processes. Despite the Ministrys observation, the Government of India was yet (until February 2012) to finalise the modus operandi of competitive bidding, the CAG rued.

Inordinate delay

The inordinate delay in the introduction of competitive bidding has rendered the extant process beneficial to private companies. Audit has estimated that financial gains to the tune of Rs.1.86 lakh crore are likely to accrue to the private block allottees (on the basis of the average cost of production and average sale price of opencast mines of CIL in 2010-11) in respect of 57 open cast/mixed mines as on March 31, 2011.

Contending that a part of this financial gain could have accrued to the exchequer by operationalising the decision taken years earlier to introduce competitive bidding, the CAG argued that there was a need for strict regulatory and monitoring mechanism to ensure that benefit of cheaper coal is passed on to the consumers.

Highlighting the practice of allocation of captive coal blocks by an inter-ministerial Screening Committee (S.C.) or through direct allocations, the CAG said that the committee had recommended the allocation of coal blocks to a particular allottee out of all the applicants on the basis of the minutes of its meeting.

However, there was nothing on record in the said minutes or in other documents on any comparative evaluation of the applicants for a coal block which was relied upon by the S.C., it remarked. Stating that the minutes of the committee did not indicate how each one of the applicants for a particular coal block was evaluated, it said, a transparent method for allocation of coal blocks was not followed by the S.C..

The CAG dismissed as not tenable the governments riposte that allocation through the Screening Committee route had been in vogue for 15 years and that allocation was not looked at as a potential source of revenue for the Central government but as an inducement for the rapid development of infrastructure.

It pointed out that at the meeting held in the Prime Ministers Office (PMO) on July 25, 2005, to discuss competitive bidding as a selection method for allocation of coal and lignite blocks for captive mining, it was stated that the rational method would ensure that the cost of coal through the competitive bidding route was less than that of coal sourced from CIL or imports.

According to the CAG report, the Coal Secretary had stated that the competitive bidding procedure would only tap part of the profit that accrued to the companies which were allocated captive coal blocks. Implicit in this is the admission by the Coal Ministry that while private captive blocks would be available to the allottees for their own needs, they would not be required to carry a huge cost of social overheads and excessive manpower as in the case CIL or Singareni Collieries Company Ltd. Hence the CAGs assertion that the Coal Ministry had acknowledged that there was gain to the allottees.

As the dust kicked up by coalgate was refusing to settle, the UPA government fielded Law Minister Salman Khurshid, Finance Minister P. Chidambaram and Minister of State for Coal Sriprakash Jaiswal to let its stand be known to the wider world. Chidambarams poser where is the loss if coal is not mined and it remains buried in mother earth evoked derisive reaction from Arun Jaitley, the Leader of Opposition in the Rajya Sabha. Jaitley said that though no mining had taken place, the fact was that the government had lost these mines at throwaway prices.

In the face of the BJPs unrelenting tirade, Manmohan Singh made a statement on August 27 contending that allegations of impropriety in coal block allocations were baseless and unsupported by facts. Terming the CAGs strictures disputable, he said that the Screening Committee had not allotted blocks to private companies arbitrarily.

The applications were assessed on parameters such as the techno-economic feasibility of the end-use project, status of preparedness to set up the end-use project, past track record in execution of projects, financial and technical capabilities of the applicant companies, recommendations of the State governments and the administrative ministry concerned, the Prime Minister said.

Competitive bidding

On the long delay in implementing the competitive bidding policy, he clarified that it was only in August 2006 that the Department of Legal Affairs had come up with the suggestion that competitive bidding could be introduced through administrative instructions. Subsequently, the Secretary, Department of Legal Affairs, categorically stated that having regard to the nature and scope of the relevant legislation, it would be most appropriate to achieve the objective through amendments to the Mines & Minerals (Development & Regulation) Act. Action, he said, had been initiated to examine the idea of introducing auction in all its dimensions and the process had culminated in Parliament approving the necessary amendments to the law in 2010.

He contended that even as the process of making legislative changes was in progress, the only alternative was to continue with the extant system of allocations through the Screening Committee mechanism since stopping the process of allocation would have delayed the much-needed expansion in the supply of coal.

The Prime Minister, while assuring the members that as the Minister in charge he took full responsibility for the decisions of the Ministry, questioned the financial gains computed by the CAG. He argued that aggregating the purported financial gains to private parties merely on the basis of the average production costs and sale price of CIL could be highly misleading.

Jaitley countered that in persisting with the discretionary coal block allotment policy, the government had corrupt and collateral motives. He further trashed the Centres argument that the BJP-ruled States did not favour a switch to the auction system.

As coal is in the domain of the Central government, and the use of natural resources such as coal should be for maximising the benefits from them to the people, the opposition parties, including the Left, criticised the allotment of coal blocks without proper policy or guidelines. They demanded the cancellation of the 142 discretionary allocations of coal blocks just as it was done in the case of 2G licences after the Supreme Courts ruling that the real price such resources command in the market be ascertained.

As the stand-off between the ruling party and the BJP remains unresolved, the issue has flagged off valid concerns about pricing public resources such as minerals in an efficient and transparent manner so that the nation is not taken for a ride by the government of the day.

Further, the CAG has underlined the need to constitute an empowered group along the lines of the Foreign Investment Promotion Board (FIPB) as a single-window mechanism with representatives of the Central nodal ministries and the State governments to grant the necessary clearances such as mining lease, mining plan, environment management plan and land acquisition to accelerate the procedures to commence coal production once coal blocks are granted for captive mining.

It also sought periodic physical inspection of allotted blocks, besides putting in place a system of giving incentives to encourage production from captive coal blocks and disincentives to discourage poor production or non-performance. It remains to be seen whether something salutary will happen in the pricing of natural resources when the allocation is done in a transparent manner.