Why auditor has dragged the govt over the coals

Anil Sasi explains the coal block allocation controversy triggered by a CAG estimate on notional losses.

Written by Anil Sasi | Published: March 28, 2012 2:40:26 am

What is the controversy all about?

According to the findings of a leaked preliminary report,the CAG had pegged the notional loss to the exchequer at Rs 10.67 lakh crore on account of the “discretionary allotment of coal blocks” to private sector and state-owned companies. In question were 155 coal acreages,handed out to companies without auction between 2004 and 2009. The beneficiaries included public sector units and some 100 private companies in sectors such as power,steel and cement. In a subsequent clarification,the CAG wrote to the PMO calling the report “exceedingly misleading” as it was at “ a very preliminary stage and does not even constitute our pre-final draft”.

How were the estimates arrived at?

The auditor reportedly came up with an estimate of the cost of production for each block by factoring in the actual cost of production in a similar Coal India mine for the same year. Then the difference between the CIL’s sale price and cost of production was multiplied by 90 per cent of the reserves in each block. The figure obtained subsequently was assumed to be the windfall gain for that block. The CAG’s logic for taking 90 per cent of the total reserves was that “detailed exploration establishes reserves at a confidence level of 90 per cent”.

How reliable were the estimates?

They are notional at best,as most of the blocks have not even started production,and are also seen as exaggerated. But there is no denying that the allocation process has been opaque.

How were these allocations made?

Coal linkages and blocks were handed out to applicants based on a point-based screening system. Applications were scrutinised by an inter-ministerial screening committee,which included representatives of the state governments concerned.

What is the rationale behind coal resources being given out free?

The system had originally evolved for public sector projects for supplying power to distribution utilities at a regulated tariff. Later,it was extended to private developers selected through competitive bidding,such as Ultra Mega Power Projects,where cheap availability of fuel resources is reflected in the power tariffs. However,in the case of merchant power projects,which aim to sell electricity at market-determined rates,the additional profit due to a cheaper coal input would go to the project developer; the consumer is unlikely to benefit. The Power Ministry guidelines for allocation of coal blocks/linkages,however,stated it was “desirable” to develop untied generating capacities to cater to the need of the short-term electricity market; hence the diversion of coal to these projects.

What is the fallout?

In the power sector,coal resources for fuelling an estimated 40,000MW of new generation capacity were handed out free. Yet,most of these projects plan to sell the generated electricity at commercial rates. So consumers do not stand to gain. The developers include some with not one megawatt of capacity on the ground but with the leverage to get coal resources. The exceptions,though,include Central utilities such as NTPC Ltd and state-sector generating units that supply power at regulated rates,in which case the availability of cheaper coal resources is likely to be passed on to consumers at large.

What is the government’s response to the findings?

The Coal Ministry has dismissed the CAG’s observations as “erroneous” and insisted a “fair and transparent” system was followed. The ministry has claimed that the concept of “windfall gain” is in itself “fallacious”,and that even the calculation of the purported windfall gain appears to be “erroneous”. On the CAG’s formula involving 90 per cent of the geological reserves,the ministry has clarified that mineable reserves in open-cast mines is only 75-80 per cent,and in underground mines extractability is even lower at 40-50 per cent. And 137 of the 155 acreages in question were handed out as captive blocks to companies in the power,cement and steel sectors,it has said. As a result,the coal produced from these blocks could not be sold in the open market for commercial purposes,with the allotment winner being the sole end-user. Of the 137 blocks,62 were allocated to state-owned power generators,where tariffs are regulated on the basis of input costs. In these cases,lower pricing of coal translates into lower tariffs for end-consumers,and the ministry had argued in favour of the policy. In the case of steel and cement sectors,while the prices of end products are not regulated,market dynamics ensure that companies cannot arbitrarily increase prices.

What is the alternative being considered for allocation of coal blocks in the future?

In light of the increasing demand for coal blocks,the government has already made a move towards a more objective system for allotting these. As the existing law did not permit auction of coal blocks,a draft bill was moved in Parliament in 2008. The proposed Mines and Minerals (Development and Regulation) Amendment Bill provides for the allocation of coal blocks through auction to private companies,replacing the current process.

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