Prime Minister Narendra Modi said on Wednesday that transparency and propriety were the hallmarks of his government, and appealed to the people and industry to transform India into a digitally empowered knowledge economy. Working on digital platforms would bring more fairness to government business, the PM contended — and gave the example of the auction of coal blocks, which would fetch hundreds of crores of rupees, without having attracted any allegations of wrongdoing. The 3,000-strong crowd appeared to agree with him that digitisation and transparency were correlated.
The fact is that the Coal Ministry had to re-evaluate the auction of two blocks amid allegations of cartelisation in bids. In the last week of March, it refused to issue vesting orders for two auctioned mines — Gare Palma IV/2 and IV/3 — to Jindal Power Limited (JPL), arguing that they had seen “comparatively low bids”.
However, the Ministry had no conclusive proof of collusive bidding, and JPL subsequently approached the Delhi High Court, which appointed state-run Coal India as designated custodian of these mines as an interim measure.
In the two rounds of electronic auctions conducted in February-March this year, the government has auctioned 29 coal mines to successful bidders who have end-use plants, and allocated another 38 mines to state-run companies to help meet their production needs. It has claimed that the total money to be accrued to the states would be over Rs 3.5 lakh crore, spread over the next 30 years. The auctions were held after the Supreme Court last September cancelled the allocation of 204 coal blocks.
While inviting bids for coal blocks, the government implemented a system of reverse bidding, under which mines would go to the bidder who quoted the lowest figure, as against the usual practice of the highest bidder winning the auction. The government’s objective was two-fold.
One, to keep electricity prices in check and, two, to ensure the benefits of lower power tariffs were passed on to consumers. It remains to be seen, though, how much restraint successful bidders will exercise — having already paid huge money for the blocks, mining rights, and to build evacuation and distribution infrastructure.
During the auction process, most bidders bid aggressively to ensure a steady supply of fuel without having to depend on imports. In the process, the successful bidders are now likely to encounter “significant under-recovery (in fuel cost)” to the tune of Rs 1,800 crore by 2017-18, credit rating agency ICRA said on March 27. While the winning bidders quoted zero cost for producing fuel, they also promised to pay the government Rs 302-1,100 per tonne as revenues.
There is no denying the fact that without any goldplating of their cost structure, there is little reason for the generation utilities to opt for captive mining. The worry is such goldplating may be limited to under 10 paise per unit, according to sources in the Power industry.
Thus, while winning bidders may sound ‘charitable’ today, it is quite possible that within perhaps a decade, they will approach the government to revisit the zero-cost formula, and seek a more realistic one that reflects the increased cost of producing coal from the mines, a top official of the Power Ministry said.
The CEO of one successful firm said that raising the resources to fund the exploration and electricity generation operations may emerge as a key challenge. “Banks seem to be conservative in lending money because we would not be able to pass on the cost of electricity to our buyers,” he said. The cancellation of coal blocks has already led to a loss of Rs 1.09 lakh crore, said a Coal Ministry official, and wondered how the winning bidders would be able to mobilise resources. The Reserve Bank of India’s Financial Stability Unit last month cautioned against the bad loans of banks, over a quarter of which are with entities in the power and steel sectors.
Most importantly, most state electricity boards (SEBs) are broke. The total exposure of banks to the SEBs is over Rs 1.5 lakh crore, of which around Rs 72,000 crore has been restructured. Power Minister Piyush Goyal says the financial restructuring plan initiated for them in 2012 has not worked well. The financial situation of the SEBs makes it unlikely they would buy electricity from private producers. The discoms too are in a mess, and seeking financial bailouts. “This situation can be partially mitigated if power tariffs are raised, but the governments in most states are unwilling to do so,” the Power Ministry official said.
The Coal Ministry has put 10 mines under the hammer for the third round of auctions, but they will not be for the Power sector. These would be for the unregulated sectors — Steel, Cement, Aluminium. Amid talk of transparency and e-governance, the government would do well to also work on improving the confidence of bidders before the next round of coal blocks auctions.
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