Coal-gate: soiled hands all around
by Virendra Parekh on 27 Aug 2012 20 Comments

A popular idiom refers to soiling one’s hands in brokering coal (koyle ki dalaali mein haath kaale). Prime Minister Manmohan Singh, widely believed to be a man with clean hands, might find his spotless kurta soiled by the coal mines allocation scandal exposed by the Comptroller and Auditor General (CAG) in its recent report. Despite stout denials of any wrong doing and seemingly clever defences put out by his minions, he cannot deny responsibility for captive allocation of coal mines and consequent loss to the exchequer.


The three scathing reports from the Comptroller and Auditor General (CAG), detailing loss to the exchequer of a humongous Rs. 3.8 lakh crore, have rocked the nation and the Parliament. The Opposition parties have blocked Lok Sabha for several days to press their demand for the Prime Minister’s resignation.


The most sensational of the reports says that the government’s move to allocate coal blocks free, instead of auctioning them, to the Tatas, Jindals, Essar, and many other companies resulted in a loss of Rs. 1.86 lakh crore to the exchequer, based on the price of the entire quantity of coal that can be mined from these blocks over their lifetime.


Another report says that Reliance Power would gain an estimated Rs. 29,000 crore over two decades by diverting surplus coal from its Sasan ultra mega power project to another plant that would sell electricity at higher rates. The auditor has also questioned the eligibility of the company to bid for UMPPs.


A third report, which analysed the privatisation of the Delhi airport, said the process was “more skewed in the favour of the concessionaire” because land was made available for commercial development without charging market rates. “With an equity contribution of Rs. 2,450 crore, of which the private consortium's share was Rs 1,813 crore, DIAL has got a brownfield airport for 60 years, and in addition, commercial rights of land valued at Rs. 24,000 crore with a potential earning capacity, according to its own estimates, of Rs. 1,63,557 crore.”


These are mindboggling numbers and have been contested vigorously, not only by the government and the companies concerned, but also by some independent observers. The irrepressible Surjit Bhalla has pointed out (Financial Express 22/8/12) that if we use price of coal in the year of mines’ allocation, the loss due to free allocation of coal mines for captive use stands reduced from Rs. 1.86 lakh crore to Rs. 1.1 lakh crore. Discounted at 10 per cent over 25 years, the present value of the reduced estimate comes to Rs. 44,000 crore. Taking into account the 30 per cent corporate tax that the companies would pay, it works out to Rs. 30,800 crore. Similarly, in the case of DIAL, CAG gives a figure of Rs. 1.6 lakh crore. But half of that would go to the government; “the share of DIAL would amount to Rs. 88,337 crore, net present value of which is Rs. 4187 crore,” says the report.


However, even after making allowance for these corrections, the illicit gains made by the beneficiaries at the nation’s expense are colossal. The Opposition parties and the public at large are justified in getting highly exercised over the manner in which rapacious politicians in cahoot with unscrupulous businessmen are plundering the country.


To recapitulate, way back in 2004 the coal ministry prepared a note proposing competitive bidding for captive coal blocks. However, suddenly and mysteriously, a note materialised from the Prime Minister’s Office that detailed the ‘disadvantages’ of allotting coal blocks through competitive bidding.


The coal secretary, in an unusual show of moral courage for a bureaucrat, rubbished the PMO note and warned of windfall gains to some private players in case the coal blocks were distributed without a bid. But his courage came to naught. His bosses had convinced themselves that introduction of competitive bidding would need amendment of the Mines and Minerals (Development and Regulation) Act, which would be a long-drawn process. They held onto this belief despite the law ministry’s opinion in 2006 that an administrative notification was enough to introduce competitive bidding.


It is possible that state electricity boards, most of them deep in red, were opposed to the auction route as it would make coal costlier and hit their bottom lines. It is also possible that some states, ruled by the BJP and the Left, opposed it as they would lose discretion. However, these were not sufficient reasons for the central government to follow a dangerously flawed policy.


The Prime Minister's men are now saying that the allocation of coal blocks was done in a transparent manner by a high-powered committee that had representatives from various departments. Wrong again. As the CAG report points out, minutes of the allocation meetings show allotments being “made merely on the basis of recommendation from state governments and other administrative ministries without ensuring transparency and objectivity”. So, we shall never know whether the coal blocks were assigned to those most capable of exploiting the resources efficiently, or on the basis of cronyism and corruption. Politically, that is the crux of the matter.


Even those who do not approve of the Opposition’s tactics of stalling Parliament would be taken aback by the sheer brazenness with which the government has come back not just to deny any wrong doing but claim credit!


The series of exposures of massive scandals, according to parliamentary affairs minister Rajiv Shukla, reflects a greater degree of transparency in public affairs. With that, the greater the number of crimes reported, the happier the citizens should feel for living in an open society with a free press!


For a government which claimed ‘zero loss’ in 2G spectrum scandal, it is natural to deny any loss in this scandal also.


Finance minister P Chidambaram assures us that since the allocated mines have remained grossly underutilized, not much damage is done! “If the coal is not being mined, there is no question of gain or loss... the notion of this presumptive loss is flawed,” he says. But it will be mined at some point of time, isn’t it? Whose loss will it be then? If the watchman hands over the key to the family treasury to a burglar, could we say it is not much of a crime since the burglar takes his time to open it?


And finally, ‘it is the states ruled by the BJP and Left that were opposed to auction.’ Fine. But since when has Congress become overly accommodative of BJP and the Left?


From the economy’s point of view, the real scandal is not so much the absence of auction (since wealth has not flown out of the country), but loss of production of a precious resource like coal (forgoing the creation of wealth).


The CAG report rightly criticizes Coal India’s inability to meet the targets for coal extraction, leading to the Centre’s decision to award captive mines to private producers in core infrastructure sectors like power, cement and steel. The whole purpose of allowing captive mining and expediting allocation of blocks was to boost production in the short to medium run.


However, as it happened, instead of exploiting the mines, the allottees simply squatted on them. As on June 2011, mining operations had started at only 28 out of the 86 captive coal blocks (private plus public) that were scheduled to start production during the Eleventh Plan (2007-12). Out of these 28 coal producing blocks, 10 blocks had had time overrun ranging from one to 10 years. Even these blocks did not produce even half of what was targeted from them.


This is not surprising. For one, few companies making steel, cement or power which were allocated captive mines had any expertise in mining. They had got the blocks cheap, with hardly any penalties for not meeting production milestones. They had more reasons to squat than develop the mines.


Where do we go from here?


First, restore to public what belongs to public. Cancel free allocation of coal mines for captive use to companies and make them pay commercial price for the material they use for commercial purposes. That price can only be determined through auction. There is no other transparent and non-arbitrary method for the Government to allocate resources vested with it, for which there are multiple parties seeking to acquire and exploit.


For coal auctions to be meaningful, however, an even more basic reform needs to be carried out: scrap the Coal Mines (Nationalisation) Act of 1973 and open up mining to professional miners from whom coal users could buy their requirement. Entry of professional private sector miners would widen the ambit of competition. They would be investing in exploration of new geographies and more efficient methods of mining, to the benefit of all concerned.


Power, cement and steel are regarded as basic industries in that a large number of other industries depend on them. Each of these basic industries, in turn, depends on coal. And no reform of coal sector is possible without breaking the monopoly of Coal India. The CAG report has once gain underlined the urgent need for an overhaul of this vital sector.


The author is Executive Editor, Corporate India, and lives in Mumbai

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