History & Overview
A lot has been said of the CAG Report on Coal block allocations on all sorts of media recently. I wanted to clear the chaff from the grain and hence this blogpost. It basically tries to simplify a long and complicated report. The blogpost itself is long so get yourself a cup of coffee.
First some history:
In 1973 PM Indira Gandhi in her ‘Nationalize the World’ plans nationalizes coal production in India. In 1976 however some leeway was made in the policy to allow specifically Iron & Steel companies to have captive coal mines that they could mine themselves and then use in production of iron and steel. Changes came in 1992-93. The govt. allowed captive coal mines for power generation and other special uses. A screening committee was set up to screen applications for captive coal mines. This only meant you could mine coal for use in production/power generation. Sale of the coal was still not allowed. Till 2004 if private players had to make applications for captive coal mines they needed to get letters of recommendation from their respective state government and prove end use of the coal.
Coal India Limited (CIL) is the Maharatna PSU that mines about 81% of all coal in the country. It has 7 subsidiaries. CIL was incorporated in 1975 when the nationalization happened.
The Original Decision
In 2003 the Vajpayee govt. announced a mission “Power for all by 2012″. Hence the Planning commission decided that the demand for coal would increase significantly in the tenth and eleventh plan period (2002-12). As a result they increased their targets of coal production for these two plans.
In May 2004 the Vajpayee govt. fell and UPA I assumed power.
The Energy Coordination Committee (PM + Ministers of Finance, Power, Petroleum, Planning Commission members, formed in 2005) decided in Feb 2006 that CIL should relinquish hold of those coal blocks that they were not likely to start production in till 2012. These blocks then would be allotted to Private players to mine in order to increase production of coal. This mined coal then could be sold to CIL at the notified govt. price. Note this was a change at this point. Before this policy decision,,while captive mines could be allotted, the mined coal could not be sold, but only used in production. In May 2006 accordingly CIL/Ministry of Coal de-reserved 48 such coal blocks.
I don’t see any wrongdoing or issue in the above decisions. The govt. needed to boost mining of coal, hence found mines that CIL wouldn’t use for a long time and decided to allot them to private players. Note that this was govt. policy – hence the CAG has no mandate to question the policy of the govt. The CAG accordingly did no such thing in the report.
However things get iffy very soon.
The CAG has described how the Screening Committee operated. Basically applications were made, then the Screening Committee shortlisted a few to make a presentation and then a selection was made.
Firstly it must be noted that the applicants for captive mines skyrocketed. For example Fatehpur mines attracted 69, Rampia 67 and Rampia dip side 41 applicants. This is one of the main reasons why competitive bidding was desirable. The situations had changed. The number of applicants were high and the Screening Committee was being pushed and pulled by external pressures.
Some funny stuff from the Screening Committee – In the Rampia and Rampia dip side out of a total of 108 applicants (67+41) only 2 applicants were shortlisted to make presentations. Eventually however 6 companies were allotted the coal blocks. Also the meeting minutes did not have anything on the applicant evaluation. No comparative criteria on how the decision was taken.
The Secretary of Coal (P.C. Parakh) in June 2004 (who sort of emerges as a hero of the whole conundrum) pushed for competitive bidding as early as 2004. He clearly stated that the allocation of captive coal blocks to private players would mean a financial windfall. He advised that the govt. tap part of this windfall for public uses. The Secretary was also very clear that the scenario had changed and the current allocation system would not be transparent or objective. The PMO and the Minister of Coal however opposed him. They brought up several issues (that the Secretary didn’t consider to have any merit) and disagreed that the Screening Committee approach couldn’t have worked.
The Ministry of Coal also opposed him saying that bringing competitive bidding would take too long since the “Coal Mines Nationalization (Amendment) Act” which was in Rajya Sabha since 2000 needed to be amended and there were too many pending applications. This objection is especially funny considering the govt. in general took such long times themselves to make any decision (try the last para of this section). The Secretary suggested an ordinance to impose it but the PMO replied saying that the correct way to do it was to amend the Act, so don’t need an ordinance for now. They decided that the amendment would be brought in the next Parliament session. This was in Nov 2004.
However in July 2005, at a meeting at the PMO it was stated that the amendment was taking too long and they would go ahead and allot more mines according to the old policy. Secretary of Coal again stated that competitive bidding would only tap part of windfall profit. But in August 2005 PMO asked Ministry to go ahead on an urgent basis to allot coal blocks.
The Department of Legal Affairs was consulted in 2004 on how competitive bidding was introducible and in 2006 the DLA after a lot of discussions offered that they could start it in 2006 by changing some administration instructions (without amendment to the act). So the competitive bidding could’ve started in 2006. But it did not!
In April 2006 a PMO meeting decided that it might be better to amend MMDR Act rather to make competitive bidding across all minerals and not just coal. They sent a note to the Ministry of Mines. The amended act finally became law in 2010 and the rules for competitive bidding were notified in 2012!!! Only eight short years since the whole conundrum started.
The CAG noted that this process to introduce competitive bidding was delayed several times and it almost seems as if there was a reluctance to start it. Wrongdoing? Maybe. Horrendous governance? Hell yeah!
How did they do?
So the govt. basically allotted 64 blocks to private parties out of a total of 216 blocks allotted (Some to Power projects and some to other govt. companies) to increase the coal production. How did they perform? In a word – Pathetic!
As of 2010-11 only a quarter of the coal blocks expecting to be producing had begun. The total shortfall from targets of the Planning commission in coal mined was a grand 52.55%. Suffice to say that the coal production increase royally failed.
In fact the govt. actually de-allocated 25 blocks because the companies who were allotted didn’t seem serious in mining coal from them! To avoid such scenarios the govt. had taken bank guarantees from these companies that could be encashed if they weren’t serious about mining. But the bank guarantee system was so messed up that the CAG estimates that about Rs. 311 Crores that were due to the govt. in bank guarantees have lapsed.
Here is the section that everyone is really interested. Is the loss to the exchequer 1.86L Crores, If not, what is it?
Firstly, nowhere has the CAG mentioned that the loss to the exchequer is 1.86L Crores. This figure is basically the windfall gain that the private parties could have achieved. All of the parties who recommended competitive bidding always recommended tapping a part of the windfall gain. If my coal block cost me 100% of my gains, why would I ever bid? What then is that number? Would I pay 50%? Or would it be 30%? Say if the govt. instead had started a profit share what would the share of the govt. be?
The Current Numbers
What is that figure 1.86L Crores comprised of? Here are the rules they used high level:
How much did the Companies pay for allotment of the mines?
Next to nothing. Phokat mein practically!
Only OpenCast mines (Easier to mine vs Underground mines) were considered
Out of 75 totally private blocks only 57 blocks were used. This does underestimate the impact a bit.
Only coal blocks allotted to purely private parties were used (No Joint Ventures with govt. companies)
Average CIL’s Cost of production per tonne of Coal as of 2010-11. Rs. 583.01 was considered
Financing cost of Rs. 150 per tonne of coal was considered.
The total tappable reserve of coal in that coal block was considered
Point of contention – This is like assuming all coal was extracted in 2010-11 and sold.
For Sales they used the average Sale price of all grades as of 2010-11
Point of contention – Sale price of coal varied over the years. But cost of production would also have varied over the years. Can we assume that the profit per tonne remained at around Rs. 295.41
That gives a financial gain of Rs. 295.41 per tonne of coal
Makes the gross margin about 30% (Not an outlandish number)
The total tappable reserve was 6,282.5 Million tonnes of coal. That number times Rs. 295.41 gives Rs. 1,85,591 Crores
Many believe that the Rs. 1.85L Cr number is overstated. Maybe, I don’t know. What then is the real number?
Discounted over 20 years
What if instead of assuming that all of the coal was extracted in 2010-11, we assumed it was extracted over a 20 year period. Let’s use the same profit % but use a Time value of money discounting at say 12% as Swaminomics suggests.
That means the private parties would sell about 315.125 Million Tonnes of Coal for 20 years earning Rs. 9,279 Crores each year. That comes down to net present value ofRs. 69,313 Crores.
There are a host of other calculations you could do, by ramping upto full production capacity for the first 5 years and then continuing at full for the rest of the time. Also is 20 years a good time frame to exhaust a block? If we knew the average production for CIL per block per year as a ratio of the total reserve, we could calculate the total exhaustion timeframe. That might give a better estimate.
There is a great dialogue in Entrapment where Sir Sean Connery asks Zeta Jones
What can you do with seven billion dollars that you can’t do with four?
Does it matter whether it’s 1.86L Cr or it’s 69K Crores or 6.9K Crores? The loss is what matters.
Unwinding the Spin
In the defense against this report several spin tactics has been used by the govt. and the media. Let’s unwind some of those.
Same policy as before just continued what BJP started
The BJP didn’t start squat! The only hand the Vajpayee govt. played here was to announce a mission of Power to all by 2012. Allotment was by screening committee since 1993. But UPA I changed the end use of the coal to include sale of coal to CIL. That’s what brought the windfall. Plus what sort of a govt. doesn’t see the sharp rise in applicants and maneuver accordingly? A bad one!
Throw all the hamaam mein sab nange jibes, nothings gonna stick!
We wouldn’t have 6% growth without this
Well, the captive blocks that were allotted had pathetic production performance. A shortfall of 55% in 2010-11. They did not meet their targets. How then are we saying that these allotments helped us achieve 6% growth?
CIL failed to meet demand – hence private blocks had to be allotted
CIL achieved all the targets that it was set all the way upto 2008-09 period. This is the point at which they started being unable to meet the demand. These blocks were allotted in 2005-06. Did they predict that CIL would not meet demand 3 years in advance?
Additionally CIL when they saw that they might not meet the targets started the ‘Emergency Production Plan’ to boost production. They requested to be reallotted 138 blocks to boost production in August 2008. The Ministry did not respond. In September 2011 they revised that number and requested 116 blocks to be allotted. The Ministry is yet to respond. Is it then fair to assume that CIL’s shortfall in production has to be related to the Ministry’s inability to take decisions?
Was there wrongdoing? I’m not sure. Was it bad policy on top of good intentions? Maybe. But in the world of public policy, intentions are worth diddlysquat! Results matter. And the clear and final result is that the govt. failed to meet the country’s coal needs while in tandem handing over some very expensive resources to private players! How are we to know that next year the govt. won’t begin an open market for coal (where the price is anywhere between 55-80% higher than the notified price) and hand a grand prize to these private players.
I’m not a socialist by any measure, but crony capitalism bugs me.
(Image Courtesy-The Hindu)