Tuesday, September 4, 2012

Auctioning coal blocks may not be the best bet

When it comes to safeguarding the wealth of the nation, the Government seems to be wanting, especially when it should be playing the role of custodian and guardian of natural resources.The iron ore issue has just about died down after Supreme Court strictures, as was the 2G scam. Now, ‘Coalgate’ is off the blocks with presumptive loss estimates totalling Rs 1.86 lakh crore.The Supreme Court’s general observations on the need to auction natural resources have made policymakers proactive again.
The Ashok Chawla report of 2011, which was gathering dust, is back in the reckoning. Most recommendations have found favour and there appears to be a near-consensus for the auction mode.
However, the dampener is that the authorities seem to be looking to arm themselves with exploration reports ahead of the auction. This is not wrong as it helps maximise revenue. Besides, bidders must know what is in store for them, given the imponderables in mining. But, then, this will take at least two to three years and, that too, if multiple agencies work in tandem.The Opposition is after the Government and the latter is rubbishing the CAG’s assumptions.Given the long list of protagonists and antagonists for the coal block auction, the question is whether auction is the only way to ensure efficient allocation acceptable to all quarters?
Yes, if total transparency needs to be achieved.
No, if the Government’s objectives are to accelerate growth, improve the dwindling cost competitiveness of Indian manufacturing, provide affordable energy to the poor, contain energy subsidy bill and provide jobs to millions of illiterate and semi-skilled persons.Consider whether allocations sans auction of coal blocks since 1993 achieved the objective. The Coal Minister said only 20 per cent of the 195 blocks are operational and industry claims even less than that.
Next, are those operational ones benefiting the people, such as the blocks allocated to the power sector?
Recently, the Coal Ministry cautioned power generator companies which have been allocated coal blocks to respond to bids floated by distribution companies (discoms). Importantly, the Ministry said it was brought to its notice that such companies were not bidding and even in cases where they did bid, their quotes were on a par with generators serviced by coal linkages. Obviously, the benefits of allocation have not being passed on, which was the primary intention of the Government while allocating the blocks.
It is well known that the closer one gets to the pithead, the greater the value of coal.Some Indian corporates which have ventured abroad for coal sourcing have been getting offers at $1 for every tonne of mine reserve in Indonesia. This does in some ways defeat the purpose of auctioning sans proper exploration.
A former Coal India head once said that, on an average, it took the company 10 years to make a mine operational. The world average is about six years.In India, the quickest, from allocation to near production, is the Sasan coal mines allocated to the 4000 MW Sasan ultra mega power project, which is said to have consumed 4.5 years as of date. Controversies apart, the reasons for Sasan mines to break the time barrier to bring coal to surface are collaboration, technology and equipment that the company brought home.
It should be understood that the private sector was bestowed allocations and the onus was on it to bring in acclaimed efficiencies to ensure early production. Further, it should also be said that the allottees were not unaware of the multiple issues that needed to be surmounted.It is also known that Coal India did not want to take up many of the mines for a variety of reasons, including its manpower cost (till recently mining operations outsourcing was unheard of).
Eighty per cent of the projects still have some way to go. There are also apprehensions that the CAG report like on 2G could lead to de-allocation of mines. Some Parliamentarians have been voicing this.
The Coal Ministry has identified 54 coal blocks with about 18.22 billion tonnes for auctioning. Out of this, 16 blocks with 7.27 billion tonnes are reserved for public sector companies, 16 blocks with 8.16 billion tonnes for power companies through tariff-based bidding and the balance with 2.79 billion tonnes for companies in other sectors.
In the larger interest of the nation, the Government could consider drawing up an impartial progress card, list out allotees who had made little or no progress, and weed out the chaff.Of course, due consideration should be given to allottees who have very genuine handicaps such as Naxal-infested areas, locations bordering tiger reserves and the like.
An over-riding tripartite agreement could also be considered with the allottee, government and a mine development operator of proven expertise to ensure early production. The modalities could also be worked out to ensure adequate return on investment for the allottee.Alternatively, the allottee could be given the exit option.
For the 54 coal blocks with about 18.22 billion tonnes identified for auctioning, the Government could also consider bids based on a non-negotiable lowest cost of coal production basis from well-explored blocks.Another criterion can be timeline-linked expenditure commitments. Yet another can be the amount of money that a bidder is willing to commit to the mine restoration fund over and above the stipulated norm.These can be backed with heavy dead rent for non-exploitation of licensed area and severe penalties for failure to comply with expenditure commitments and environmental norms.
Such bidding norms would put off the wheeler-dealers.

- Umesh Shanmugam 

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