Coal sector: Still an area of darkness

The auctions do not inspire confidence. The entrants lack experience, even as we need to catch up with global best practices

Coal Minister Piyush Goyal is reported to have informed the Parliament that the 67 coalmines already auctioned/allotted will likely yield a revenue of ₹3,35,370 crore and, in addition, reduction in electricity tariffs will likely yield ₹69,311 crore in consumer savings.

These numbers have been touted as a measure of: (a) success for the ‘transparent’ mine allocation process initiated by the new government; (b) value created by way of additional revenue for State governments through ‘fair valuation’ of mineral reserves; and (c) success in ushering reform and competition in the moribund coal sector.

A meaningful analysis raises serious concerns over all three claims.

Hot and coal

Only 29 of the 67 blocks have been auctioned. The remaining 38 coal blocks have been allotted to the same State governments and public sector units as earlier with minor variations.

The allocation of these 38 blocks is thus no more ‘transparent’ than the one before. Importantly, these 38 blocks pay an identical reserve price of ₹100/tonne irrespective of the coal quality or mine characteristics, perpetuating the non-level playing field and the opacity that plagues the sector.

Essentially, the royalty on these 38 blocks has been selectively raised by ₹100/tonne creating yet another distortion.

An analysis of the pattern of prices paid by top bidders even for the 29 auctioned blocks raises many unanswered questions and compounds the concern, with lack of ‘transparency’ resulting from the refusal to share full details on competing bids.

The number of unique bidders for a given block remains a mystery as subsidiaries of the same companies were allowed to bid as independent bidders.

Indefensible bidding rules have led to a peculiar anomaly whereby the ‘fair value’ of a given grade of coal from similar mines depends upon its end use!

And if indeed the bids resulted in a ‘transparent’ ‘fair valuation’, then why only charge ₹100/tonne from the 38 blocks not bid out?

Surely, someone would challenge the claimed ‘transparency’ and ‘fair valuation’ in court.

Paying dearly

The naivety in the claims being made of enhanced revenues for the State governments and savings for the consumer seems to stem from the mistaken belief that the successful bidders will absorb these higher costs and not pass them on to the consumer.

Does the Government have a secret mechanism that will ensure this? Or is it that the allottees of the coal blocks, most of whom have limited or no experience in mining, will be able realise savings in mining coal to pay for these additional costs?

Is there any evidence of realising such savings through efficiency gains since 1993 when the allocation of blocks commenced? People in India already pay the highest prices in the world for energy relative to their earnings.

Lack of access to energy and energy intensive commodities such as steel and cement will be further exacerbated by higher prices, hampering development.

In any event, the Supreme Court cancelled the allocation of 204 blocks because it found the allotment arbitrary and not because the State governments lost potential revenues. The arbitrariness in block allocation, as demonstrated above, still remains in respect of the 67 blocks re-allocated thus far.

And before we start swooning over the additional revenues, let me clarify that these additional revenues will result over 30-40 years, assuming all the coal is actually extracted by the new owners whose primary business is not mining.

And any comparison of the additional revenues with the ₹1.86 lakh crore imputed loss, estimated by the CAG, only further underscores the naivety of those tom-toming this as the grand outcome of the auctioning process.

And this brings us to the most important concern. True value creation in the mining sector requires raising the level of extractable reserves, actually exploiting such extractable reserves, raising the amount of mineral extracted from a given reserve, improving the quality of the resource extracted, raising productivity, reducing costs of mining and the subsequent handling and transportation of the extracted mineral and, above all, deploying best practices and cutting edge technologies that enable all of the foregoing sustainably.

Global competition

All of this can only happen if we allow commercial exploration and mining of Indian coal by leading global players and institute an independent regulatory regime that fosters genuine competition in the coal sector.

India’s long-term interest lies in making Coal India, a $40-billion giant, compete with the best in the world instead of making fragmented blocks available to companies that have never mined coal before.

The Supreme Court gave the current government a golden opportunity to move forward and realise the full potential of India’s coal reserves by scrapping the Coal Mine Nationalisation Act and allowing commercial exploration and mining of coal in India.

The fact that the government was able to take in its stride the cancellation of coal blocks, without rocking the boat speaks volumes for its leaders.

Unfortunately though, the lack of depth and capacity to design and implement real reforms that effectively change ground realities is also visibly evident. The government is thus seeking credit for the wrong reasons.

India does not have the luxury of losing out on opportunities. Nowhere does this ring truer than in the energy sector.

The writer is the former Principal Adviser Power & Energy, Government of India

http://www.thehindubusinessline.com/opinion/coal-sector-still-an-area-of-darkness/article7151267.ece

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