CAG report indicts govt for improper allotment of blocks, de-allocation spectre rears its head
Jyoti Mukul / New Delhi Aug 30, 2012,
Business Standard
Will all of the 57 coal blocks mentioned in the recent Comptroller and Auditor General (CAG)’s report be de-allocated by the government? If so, what ramifications will it have on the companies mentioned in the report, and the customers they serve? This is the question that is foremost on everybody’s mind, as the latest imbroglio concerning India’s natural resources unravels. This time, Prime Minister (PM) Manmohan Singh finds himself directly in the line of fire for being the coal minister twice during the period in which the alleged gains of Rs 1.86 lakh crore were passed on to private coal miners.
In some ways, the beginnings of an answer lay embedded in the 32-paragraph speech delivered by the PM amidst a raucous din in Parliament. In it, two lines carried huge import for the industry — Singh revealed that his government had initiated action to cancel the allocations of allottees who did not take adequate follow-up action to commence production. Some 25 mines have already been de-allocated for not beginning production or showing few signs of progress.
Singh also mentioned that the Central Bureau of Investigation (CBI) is scutinising “allegations of malpractices”. While, it is not clear what exactly the CBI is looking into, a senior coal ministry official says, “CBI is asking questions on all 57 blocks and we are answering them.” Suddenly, just when the country had put the 2G spectrum auction scam behind it and readied itself for fresh auctions, another fiasco involving allotted natural resources threatens to become the next big scandal.
Priceless
194 coal blocks with aggregate geological reserves of 44,440 million tonne were allocated to different government and private parties till March 31, 2011. Now, coal blocks never had a value attached to them whenever they were allotted. Coal cannot be mined and sold except by the government’s own company, Coal India, and state mining companies. The law allows only captive use of coal in notified sectors such as iron and steel, power, cement, and coal to liquid projects.
None of the natural resources, in fact, are priced in the country when handed out to private companies for development and production. The logic is simple: The government encourages production of these resources, whether coal, iron ore or oil for use as inputs in other goods and services. No mineral acreage is allotted either through bidding or committment of a share to the government, except in the case of crude oil and coal bed methane. Coal has been coming at no cost to companies with domestic mines. All they had to do was to mine the coal and pay a royalty to the state governments.
De-allocation damage
Captive mines are the lifeblood of several industries and de-allocation could severely impede their future projects. A large portion of the country’s steel production, for instance, comes from captive iron ore and coking coal mines. The major beneficiaries of such captive resources, merely because of first mover advantage, have been Tata Steel and the government’s own, Steel Authority of India, though they, too, have to import coal.
Even in the case of ArcelorMittal, which is yet to start production in India, steel making would be backed by captive iron ore and coal mines. The Rampia and Seregarha coal blocks were allocated to ArcelorMittal for power generation at its proposed integrated steel plants in Odisha and Jharkhand, respectively. “We have invested money towards mine development and have completed prospecting at Seregarha and are awaiting allocation of a prospecting licence for Rampia (along with other partners),” a company spokesperson said in response to emailed queries. Coal mines are expected to generate 750 Mw each from the two power plants. This is also the case with JSW Steel Ltd, which has two mines allotted to it in West Bengal and Jharkhand, which it shares with other companies.
In the power sector, which uses over 80 per cent of the country’s coal production, 85 per cent of the 76,000 Mw additional capacity targeted to come up in the next five years will be based on coal. Among the 57 blocks, 20 have been allotted for power projects belonging to companies like Essar Power, Bhushan Power & Steel and Tata Power. Sponge and pig iron producers have another 25 blocks allotted to them either alone or in a consortium with other companies.
No science to allocation
The allocation of coal mines has been done through the screening committee route where representatives of various ministries go through applications that have recommendations from the state governments. There are no set criteria for selection. At the core of the CAG calculations lies the criticism that the 57 captive blocks did not start production, resulting in 1,302 million tonne of extractable reserves which are under lease to companies that got them without going through a competitive bidding process. While 20 of these blocks lie in the no-go areas where environment clearances were restricted, officials in the government and some of those companies maintain that it was not possible to develop the mines so quickly.
NTPC, which is not part of the CAG list because it is a government company, had also received de-allocation notices for five mines of which the government has agreed to return three. “The way coal mining is allocated to us is only a piece of land which is shown. There is no geotechnical investigation, no survey of land, no environmental clearance and no land acquisition. Unlike a UMPP (ultra-mega power project), we have to do everything. Coal India in its mines has not been able to do these activities in 12 years. International mines take a minimum of seven years to start mining,” says Arup Roy Choudhury, NTPC chairman and managing director, while questioning the charges of delay in production.
Do industries gain?
The financial gains that have been ascribed to the the 57 allottees based on the coal reserves are actually an estimate of the coal input cost in the end product. As Roy Choudhury points out, there is no gain in the case of power plants that operate under the regulated regime of the Central Electricity Regulatory Commission simply because the cost is passed on to the consumers. “There cannot be a loss to the country but a benefit to the ultimate consumer. The regulator fixes cost and bills accordingly. Whatever the cost, whether coal is priced or comes from a captive mine, is a pass-through,” he says.
Even in the case of Essar, the company has plans to produce about 3000 Mw with an investment of about Rs 16,000 crore on the back of captive coal from one power plant each in Jharkhand and Madhya Pradesh. Around 75 per cent of this power is to be sold under power purchase agreements with state governments. Of the remaining, around 12 per cent power from the Jharkhand unit has to be sold at just the variable cost and another 12.5 per cent at 15 per cent return on equity to the state government since the coal mine is situated in that state.
In its defence, the coal ministry had told CAG that 17 blocks were allotted to the power sector, where tariff is regulated on the basis of input costs and the transfer price of coal is assessed on actual cost basis. Even in the case of steel and cement, the ministry says a competitive market ensures the best benefit for consumers. Though most companies that figure in the CAG list and to which Business Standard spoke did not comment on the importance of blocks to their end-use projects, a senior executive in one of the companies says that the whole idea of getting private players into the business of coal mining is to get a larger quantity of products, whether it was power or steel, into the market at cheaper rates.
Even if bidding is introduced, higher price of coal is something that does not bother private players as much as the availability and access to raw material and fuel through stable contracts. The market, after all, gets adjusted to a higher price as the entire industry reacts to it. Regardless of how the CAG report plays out, the fact is that a natural resource that was once taken for granted now has a considerable value attached to it, changing its economics for times to come.
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