Friday, August 17, 2012

Coal Blocks Allocated as Per Recommendations of Screening Committee Consisting of Representative of State Governments
Calculations of Financial Gains are Flawed
Competitive Bidding of Coal Blocks Proposed in 2004 Could Not be taken up Due to Conflicting Legal Opinions
Strengthening of Monitoring Mechanism Proposed to Ensure that Benefits of Cheaper Coal are Passed on to the Consumers

Allocation of coal blocks for captive use commenced in the year 1993 after the amendment in the Coal Mines (Nationalisation) Act, 1973. Between 1993 and June 2004, 39 coal blocks were allocated. Initially there was not much demand for such allocation and the applicants themselves used to identity coal blocks and apply for allocation. Later on due to increase in number of applications and to ensure consistency, a consolidated set of guidelines was evolved in November 2003. In order to further improve upon the system and to bring in transparency it was decided in September 2005 that the Government would invite applications through advertisement in important national and regional newspapers, which would provide opportunity to all eligible applicants to apply. 
 Allocation Procedure:
Since 1993 the allotment of coal blocks was through a mechanism of inter ministerial Screening Committee. The Screening Committee was a broad based body with representation from the State Governments, concerned Ministries of the Central Government and the coal companies. This procedure of allotment of blocks through the Screening Committee was well established and accepted by all successive Governments since 1993. The procedure adopted for allocation involved wide consultations with all stakeholders. The parameters and the guidelines for allocation followed by the committee, while evaluating the applications, were duly published on the website of the Ministry of Coal before inviting the applications. Comprehensive details about the applicant, the group, performance of the group, financial strength, readiness of the end-use plant etc were placed before the committee so as to enable it to make appropriate recommendation keeping in mind the comparative merits of the applicants.
The Screening Committee assessed the applications having regard to the matters such as techno-economic feasibility of the end use project, status of preparedness to set up the end use project, past track record in execution of projects, financial and technical capabilities of the applicant companies, recommendations of the state governments and the Administrative Ministry concerned. Therefore, to hold that the process of allocation was not transparent does not appear to be based on appreciation of the process of allocation that was put in place in the prevalent circumstances. The subsequent move to introduce competitive bidding is to make the selection process more objective and demonstrably transparent.
Delay in commencing the Competitive Bidding:
It was only the UPA-I Government, which in 2004 first considered allocation of coal blocks through the competitive bidding route. The Government had the intention of introducing the bidding process as soon as possible and therefore proposed to formulate rules / guidelines for the purpose under the existing law.  At that time the Ministry of Law and Justice opined that rules/guidelines for bidding system for allocation of coal blocks can be introduced only by amending of the CMN Act, 1973.  Accordingly, the MoC proceeded with the steps to amend the CMN Act. After discussions and deliberations at various levels including inter-ministerial consultations, a view emerged that instead of the CMN Act, the bidding system be introduced through amendment of the MM (D&R) Act. This decision was taken in a meeting held on 07.04.2006 where besides others Law Secretary was also present. Thereafter, in the month of June’06 a reference was made to Law Ministry suggesting the proposed amendment of MM (D&R) Act. The view that the system of bidding could be introduced through administrative instructions was given by Law Ministry on 28.07.2006 for the first time. In light of the conflicting opinions expressed by them, a reference was again made seeking clarification on the issue. Law Ministry in its opinion dated 30.08.2006, after explaining the rationale for the earlier opinions, finally opined that the administrative Ministry may initiate suitable measures for amendment of the MM(D&R) Act as proposed. Also the Secretary (Legal Affairs), in a meeting held in September 2006 to discuss this issue, had opined that having regard to the nature and scope of relevant legislation, it would be most appropriate to achieve the objective by amendment of MM(D&R) Act. It must be reiterated that apart from only once in 28.7.2006 thereafter in all subsequent consultations Law Ministry never opined that this process can be introduced through administrative instructions.
In order to ensure that such an important procedural change is acceptable to the majority of stakeholders a process of consultation was necessarily required and the Government did so. During consultations Governments of Chhattisgarh, West Bengal and Rajasthan did not agree with the proposed changes. Briefly, they stated that if the proposed process was put in place, state government’s prerogative in selection of a lessee would get diluted, the existing process was preferable as it provided for objective assessment and took into the views of state governments. They further observed that the proposed competitive bidding process would be based solely on higher prices offered by prospective allocatees and would render state government’s views redundant. They also feared that the proposed process would lead to increase in cost of coal and would make the new projects unviable and would only help industrialization of developed areas to the detriment of coal bearing areas. Ministry of Power was also of the view that this would lead to enhanced cost of coal. Under the given circumstances, particularly due to the opposition from some of the State Governments, it was necessary to carefully deliberate and develop a consensus. After multi-layered consultations the MM(DR) Amendment Bill was introduced in Parliament in October 2008.  The Bill was referred to the Standing Committee.  The Standing Committee examined the matter and submitted its report in February 2009 and advised further consultations with the State Governments. After these consultations only the Bill was considered and passed by the Parliament on 9thSeptember 2010.  At times legislative enactments take considerable time not only because of the procedures involved but also due to criticality of consultations and building up a consensus on sensitive issues before they are finally placed in the Parliament for its enactment. Further, to operationalise competitive bidding it was necessary to frame guidelines and procedures for auctioning of captive coal blocks.  After necessary consultations with all the stakeholders, the rules were notified on 2nd February 2012.
Financial gains to private companies:
The intent of the government behind allocation of coal blocks was to induce rapid development of infrastructure that is so very essential to keep the economy on high growth trajectory, by involving the private sector to invest in identified priority sectors so as to create additional capacities. By implication it was apparent, right from inception the Central Government did not reckon it as a revenue generating exercise. Moreover, gains would accrue to the allocates only if they had the choice of either buying coal from the CIL or producing coal from their respective coal blocks. In fact CIL was not in a position to cater to the entire demand of coal in the country. Therefore, comparison with CIL price to arrive at financial gain is only notional. On the other hand to put the country on a path of higher growth, capacities in power, steel, cement sectors were required to be added expeditiously. It is to be reiterated that such availability of coal through the allocation of coal blocks was over and above that which could have been made available through Coal India Limited (CIL).    Hence, only way for such capacities to come up was through this policy of coal block allocation which necessarily come up over a long period of time considering the various clearances which are required.  On account of allocation of only these 57 coal blocks, which have been covered in CAG Report, as much as 18,300 MW capacity in power generation, 35 MTPA capacity in sponge iron, 13.25 MTPA capacity in steel and 7 MTPA capacity in cement will be created using the mineable reserves as computed by CAG itself. Considering the existing capacities especially in power/ iron and steel sector, these additional capacities are extremely critical for the national economy.  
The CAG Report has observed on the financial gains to the private parties. Apart from the transparent procedures which were observed whilst making such recommendations, as outlined above, and which were done within a broad policy framework, it is to be stated that the calculation of the said financial gains were flawed on certain basic fundamentals related to the geological sector. The financial gains to private parties have been computed on the basis of the difference between the average sale price and the production cost of CIL as well as estimated extractable reserves of the allocated coal blocks. This computation of extractable reserves based on averages would not be correct in the geological sector. There are wide variations in extractability even in the mines located in the same coalfields or which are even adjacent to each other. Also, the cost of production of coal varies significantly from mine to mine even for CIL due to varying geo-mining conditions, nature of the seams, method of extraction, surface features, number of settlements, availability of infrastructure etc. It may also be relevant to note that CIL has been generally mining coal in areas with better infrastructure and more favourable mining conditions, whereas the coal blocks offered for captive mining are generally located in areas with more difficult geological conditions. Under these circumstances aggregating the purported financial gains to private parties on the basis of the average production costs and sale price of CIL could be highly misleading even after some theoretical adjustments have been made in the CAG Report. Moreover, as the coal blocks were allocated to private companies only for captive purposes for specified end-uses, it would not be appropriate to link the allocated blocks to the market price of coal.

It may also be noted that the mineral concessions are granted under the MMDR Act which inter-alia provides for allocation of major and minor minerals like iron ore, coal & lignite, manganese, bauxite etc. Till the amendment had been introduced in the MM(DR) Act in September, 2010, there was no provision in the said Act allowing for competitive bidding or auction of mineral resources. It is seen that the various processes adopted by the Government till September, 2010, had been in consonance with the provisions of the MM(DR) Act. These provisions have been upheld by the Supreme Court in their pronouncements from time to time.
Regulatory and Monitoring Mechanism
CAG has observed at page 12 of the Report:
“audit is of the strong opinion that there is a need for strict regulatory and monitoring mechanism to ensure that the benefit of cheaper coal is passed on to the consumers.”
Ministry of Coal, in consultation with Ministry of Power, has already issued instructions to all the coal block allocattees who have been given coal blocks for generation of power to participate in the bids for sale of power from their end use projects as per the guidelines of Ministry of Power. In case of steel and cement sectors, the prices of end products will be regulated by the market forces both by the existing capacities within the country as also with the international steel producers. However, Ministry of Coal will further examine the matter in consultation with the Ministry of Steel and Department of Industrial Policy and Promotion.  
Production performance from Captive coal blocks:
            The performance of allocated captive coal blocks has been reviewed from time to time and last detailed review was undertaken in January, 2012. Based on the review, advisories were issued to allocatees of 58 coal blocks, another 32 allocatees were cautioned and 58 allocatees have been show-cause notices. So far 25 coal blocks have been de-allocated. As announced by the then Hon’ble Finance Minister in his Budget Speech, 2012 an Inter-Ministerial Group (IMG) headed by Additional Secretary (Coal) has been constituted. The IMG is to undertake periodic review of the progress of the allocated coal blocks and to recommend action including de-allocation if required, consider replies to show cause notices and recommend action and to make assessment and recommend action as to deduction of Bank Guarantee.

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