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Friday, December 06, 2019

Off the coal blocks

Aggressive bidding and transparency in the auction process have rescued the sector from the uncertainty caused by the cancellation of allocations.

Written by Partha Bhattacharyya | Updated: February 25, 2015 12:00:55 am
In both the reverse and forward auctions, the conditions laid down ensure transparency and aggressive bidding, which insulates the process from criticism. In both the reverse and forward auctions, the conditions laid down ensure transparency and aggressive bidding, which insulates the process from criticism.

The auction of coal blocks is off the ground with a flying start. Both the forward auction for the non-regulated sector and the reverse auction for power utilities are witnessing aggressive bidding by companies that meet the end-use criteria of eligibility.

The government deserves rich compliments. The huge uncertainty in the sector, arising from the verdict of the apex court cancelling most allocations on grounds of illegitimacy, has been reversed convincingly in the shortest possible time. The transparency built into the process is beyond question. The excitement generated among bidders and the resultant euphoria is commendable.

Coming to the outcome of the process so far, it is worthwhile to deliberate separately on the reverse auction and the forward auction. In the reverse auction adopted for blocks reserved for the power sector, the winning bidder is the one that bids the highest discount to the price of coal worked out on the basis of the notified price of Coal India Ltd (CIL). The price of coal to be considered for determining the power tariff would be the CIL price, less the offered discount. In other words, the higher the discount offered, the lower will be the tariff payable by the consumer. The discount offered by the highest bidders in this category, so far, has been a very significant portion of the CIL price, in the range of 50 to 70 per cent.

Since the power tariff in these cases will be determined on the basis of the discounted coal price of the winning bidder, who has already made substantial investment in the power plant, there is no option left but to actually mine coal from the block. The power tariff will not cover coal sourced in any other mode at a higher price.

(Illustration by: Pradeep Yadav) (Illustration by: Pradeep Yadav)

The issue, therefore, will boil down to the adequacy of the margin left at the discounted price to cover investment and mining costs. Coal mining, going forward, will need to be more and more socially and environmentally sustainable. It will also need to address the expectations of coal workers. The cost of land acquisition can only move northwards. Incidentally, in the absence of minimum wages prescribed by the government for coal workers, private contractors are, in most cases, known to pay the minimum wages of the state, which far from covers the arduous nature of the work. A demand for separate wages for contract workers in this segment has been gaining momentum. Indeed, CIL had earlier, in 2012, agreed to a nearly threefold increase in wages of contract workers that is yet to be implemented. As and when these are enforced, the cost of mining will increase much beyond current levels, squeezing the margins further. Whether coal mining remains viable with these cost pressures at the deeply discounted coal price is a question that needs careful evaluation.

Coming to the forward auction, in many cases, the winning bidder has offered a price to acquire the right to mine coal that is higher than the price currently charged by CIL for the supply of a similar grade of coal itself. Adding to this the cost of mining, the transfer price of coal to the non-regulated end-product could substantially exceed the cost of coal from CIL supplied to competitors of the winning bidder. With international coal prices under pressure and oil prices at new lows, the transfer price may even exceed the imported coal price. However, unlike the winning bidders in the reverse auction for power, the winning bidder in this case may opt in favour of not operating the coal block and decide to source coal from the market.

In the case of the non-regulated sector, the beneficiary of the aggressive bidding is the state government. The unexpectedly huge inflow to the state exchequer does not require the state government to expend even a small portion of the receipts towards the development of the mining area or the local community. As a result, the onus is on the winning bidder to incur these expenses in addition to the huge payout to the state government, which may eventually increase the possibility of an abandonment of coal mining. The state government, in that situation, loses the cash inflows. One approach to reduce the chances of such an eventuality is to reach a consensus with the concerned state government to take care of investment in community assets from the proceeds of the cash inflows.

It is thus seen that in both the reverse and forward auctions, the conditions laid down ensure transparency and aggressive bidding, which insulates the process from any possible criticism by institutions like the CAG. However, whether it is conducive to promoting sustainable mining depends only on the premise that the bidders be fully aware of the implications of their actions. Unfortunately, self-destructive bidding is not unknown in the Indian context. Bidding for ultra mega power projects (UMPPs) has provided examples in the not too distant past, with winners throwing up their hands after finding it impossible to deliver power at the offered price. Analyses of the root cause in all of these cases indicate an inadequate core competence in coal mining or coal sourcing as the underlying reason. In the present case of bidding among end-users, the possibility of a similar inadequacy cannot be ruled out.

One cannot rule out the possibility of things getting sane and rational with more blocks being offered for auction. However, in case this does not happen, the government, despite its best intentions, may eventually become a spectator in witnessing coal mining in the end-use segment not picking up to the desired level due to a lack of financial sustainability.

Is there a way to make the process more sensible without compromising transparency? Two distinct approaches could be considered. The first is to determine the normative cost of mining, which includes a reasonable margin for each block, and bids that provide less than 80 per cent of such costs be deemed unsustainable and hence rejected. The second option is to open commercial mining and carry out bidding among players with proven core competence. The tacit assumption that bidders know the implications of what they are doing will certainly be more appropriate in such cases.

The writer, former chairman of Coal India Ltd, is executive director, Deepak Fertilisers and Petrochemicals Corp Ltd. Views are personal.

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