Bids for blocks: Coal ministry junks profit-sharing model

Difficult path: ‘In profit sharing,cost recovery will require high level of monitoring by the government’

Written by Amitav Ranjan | New Delhi | Published: July 31, 2013 1:48:34 am

While the petroleum ministry dithers on moving auction of oil and gas blocks from the existing profit-sharing mechanism,scam-hit coal ministry has junked this model in seeking bids for coal blocks in future.

In a proposal to the Cabinet Committee on Economic Affairs,coal ministry says that the risk to the bidder was minimal in profit sharing and it required greater vigilance in checking fudged costs — a charge similar to that levelled by the CAG while auditing some of the oil and gas blocks.

“The risk to the bidder in this (profit share) is minimal,especially for mines which are regionally explored,where estimating production,costs and reserves is difficult. However,cost recovery will require high level of monitoring by the government,making it difficult to implement,” it says.

Instead it supports the revenue-sharing model where bids need to be submitted in rupees per tonne that the bidder would pay as the government’s share. “Government share is calculated in rupees — coal produced multiplied by the quoted rupees-per-tonne. From the options,revenue share and rupees per tonne approaches do not require active monitoring of costs of the bidder which is a difficult exercise,” it adds.

Revenue sharing was suggested by the Rangarajan Committee last January in auctioning of oil and gas blocks under the New Exploration Policy instead of the cost-recovery based profit sharing. But new petroleum minister M Veerappa Moily sent it in a tailspin by asking another panel headed by Vijay Kelkar for a relook.

The Kelkar committee,entrusted to suggest steps for enhancing domestic oil and gas production,was given the additional job after he asked to put on hold a decision on Rangarajan’s suggestion for conversion to the revenue-sharing model.

In September 2011,the CAG had asked the petroleum ministry to review the profit-sharing formula for future production sharing contracts and inspect all high value purchases by the contractor to check goldplating. The coal ministry’s CCEA note circulated last week proposes production-linked revenue sharing,as reported by The Indian Express on July 16. It says that the floor/reserve price for each block would in rupees-per-tonne and fixed upfront by using the discounted cash flow method.

The successful bidder would have to pay 10 per cent of the intrinsic value of the coal block as upfront payment to ensure that the winning bidder has some minimum commitment to develop the block right from the start.

* In a proposal to the Cabinet Committee on Economic Affairs,coal ministry says that the risk to the bidder was minimal in profit sharing

* Instead the ministry supports the revenue-sharing model where bids need to be submitted in rupees per tonne that the bidder would pay as the government’s share

*Revenue sharing was suggested by the Rangarajan Committee last January in auctioning of oil and gas blocks under the New Exploration Policy

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