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Vol. 6 | Issue 2 | May 2012
 
EXPOSE
coal scam
 
Robbing the Black Gold
The CAG report on discretionary allotment of coal blocks only touches the tip of the scandal, and could well turn out to be the ‘mother of all scams’
 
 
by Naresh Minocha
 
The Comptroller & Auditor General’s draft performance audit on discretionary allocation of coal blocks, identifying windfall benefits reaped by allottees, has evoked extreme reactions from its critics.
 
A high-profile economist, for instance, dubbed the CAG findings as “outlandish” under a column headlined ‘Where donkeys fly’ published in The Indian Express. Similarly, Coal Minister Sriprakash Jaiswal rubbished CAG contentions, including its recommendations for auction of coal blocks as “baseless” and “illogical”.
 
Both these eminent persons apparently did not do their home work before targeting the CAG. They should eat their words after reading this write-up. The fact is that the CAG has barely scratched the surface of the coal blocks’ allocation scam! Its 110-page draft report made public by The Times of India does not mention certain crucial elements of the scam.
 
The CAG ought to delve deeper into the scam before finalising its report. And once it does so, it would end up concluding that captive coal mining (CCM) is a sham. It is a bogey that has caused huge loss to the state exchequer and has brought windfall benefits to the coal block allottees (CBAs) and their associates. It has legitimised crony capitalism and epitomised reforms paralysis.  
 
Most of the CBAs have not mined even one gram of coal. Many of them have invested peanuts in the allotted blocks. Some public sector CBAs have not even invested a single rupee and yet earned a fortune from the allocations. A majority of the CBAs have merely acted as landlords. They have handed over the blocks to third parties called mine developer-cum-operator (MDO)/mine managers.
 
The prime contributors to the phased dilution of the 1993 CCM policy includes legal luminaries and now senior Cabinet Ministers like P Chidambaram and Kapil Sibal, whose legal opinion in 1994 was endorsed by the Attorney General in 1996, ultimately resulting in substantial relaxation of CCM guidelines (Box: Captive Coal Mining diluted to the core).
 
By opting for MDOs and other investors, the CBAs harvested windfall benefits in the form of cashless /sweat equity not only through joint ventures (JVs) but also through downstream power JVs.
 
A few CBAs articulated their rights over waste from coal washeries linked to their coal blocks. And they are now monetising these rights as facilitation fee per tonne of washery reject and/or as cashless equity in washery rejects-based power plants! 
 
Certain CBAs have also secured from MDOs or from JVs one-time upfront fees and facilitation fee per tonne of coal mined over the entire lifespan of the block. Other CBAs have either secured or asked for commitment from MDOs to supply coal at steep discounts (more than 42 per cent in one case) to the market price. Others have secured access to cheap or free power to be produced from such coal. The CBAs have indeed opened a cornucopia of assured benefits. They have also limited their investments or exposure to 26 per cent equity investment in mining JVs.
 
The information about this sea of wealth is littered in tender documents, testimonials, brochures and press releases issued over several years. And, yet such benefits find no mention in the CAG report.
 
The CAG should collate data on all such and similar benefits reaped and proposed to be reaped by CBAs. Their aggregation in a tabular form will give a broad picture about the bonanza reaped by CBAs. This exercise will also give the public a rough idea of the presumptive revenue loss to the states.
 
TheCAG has relied on just one norm for calculating a windfall gain of Rs 6.31 lakh crore to allottees over the entire span of the mining period (which may vary from 10-30 years, depending on the size of the reserve and the yearly extraction). The CAG has reckoned the windfall in two steps. It first calculated the difference between the sale price of coal and cost of production in CBAs’ mines. It later multiplied the price difference with discounted coal reserves of CBAs.
 
This windfall gain covers both captive CBAs and Central and state PSUs that were separately allotted coal blocks. The CAG excluded coal blocks allotted to developers of ultra mega power projects (UMPPs) from this calculation as they bagged UMPPs through electricity tariff-based bidding. The assumption here is that the lowest tariff quoted by successful bidder factors in the advantage of captive mining.
 
The Coal Ministry has so far allocated 216 coal blocks, with geological reserves of about 50 billion tonnes since June 1993. Out of these, 24 allocations have been cancelled. There have been several litigations over allocations as well as cancellations.
 
A few critics and analysts have mistaken the CAG’s windfall calculation as revenue loss to the exchequer. The CAG has neither considered nor valued other benefits, such as cashless equity reaped by CBAs and profits to be earned by MDOs. The CAG has also not estimated the presumptive and actual revenue loss to the states.
 
It is an extremely difficult task and yet worth trying. No two coal blocks are identical, unlike the radio-spectrum of the 2G scam fame. The value of a coal block depends on factors such as geology, reserves, mining techniques, size of reserve, its location and the quality or grade of coal.
 
Some have mistaken the CAG’s windfall calculation as revenue loss to the exchequer. The CAG has neither considered nor valued other benefits, such as cashless equity reaped by CBAs and profits to be earned by MDOs. The CAG has also not estimated the presumptive and actual revenue loss to the states.
 
Thus, the CAG should have relied on timelines specified in CBA guidelines to compute the loss of royalty or dead rent due to the inordinate delay in the development of blocks. The reasons for delays are many. These include availability of domestic coal at cheap prices even after decontrol of coal prices in January 2000. As domestic and global coal prices soared, and the demand for blocks turned into a scramble, it dawned on the CBAs that they were sitting on a jackpot. This was corroborated by subsequent MDO deals or tendering competitions arranged by CBAs for their respective blocks.
 
Had the blocks been auctioned, the states and not the CBAs would have collected facilitation fee per tonne of coal, similar to the revenue-sharing arrangement in the telecom services sector, apart from existing royalty. They could have also asked for upfront, one-time licence fee from bidders. Such fee would certainly be realisable in the case of fully explored blocks having prime grades of coal.
 
The CAG could have averaged different rates of facilitation fee per tonne of coal negotiated by the CBAs with the MDOs. It should have then multiplied the average fee with total reserves of allotted coal blocks to arrive at the gross revenue foregone by the states due to the Centre’s feet-dragging over auctions. 
 
Different percentages of cashless equity or sweat equity, ranging from 26 per cent to 51 per cent that CBAs have secured in mining JVs should be roughly valued to give the public an idea of a second set of presumptive loss to the states. A similar exercise needs to be done for the sweat equity of 11-26 per cent that CBAs have sought in the washery rejects-based power JVs. 
 
The allocation of coal blocks to state-owned PSUs under the Government Dispensation Route (GDR) has turned out to be a backdoor for private energy companies in non-captive coal mining, a business that has remained a non-starter since 1997 for want of amendments to the Coal Mines (Nationalisation) Act, 1997! 
 
It is a backdoor entry because such PSUs are allowed to sell fuel to any customer. And, PSUs have shared this business opportunity with private MDOs by forming JVs with them, giving them control of such blocks. And in most cases, the PSUs have not invested anything from their own pocket! In fact, some state PSUs had the audacity to invite expression of interest (EOIs) for joint venture participation and grant of sweat equity, etc., even before they applied for coal blocks. And such EOI invitations attracted a fairly good response.
 
Most of the coal block allottees have not mined even one gram of coal or invested anything. Even some public sector CBAs have not invested a single rupee and yet earned a fortune from the allocations. A majority of the CBAs have merely acted as landlords. They have handed over the blocks to third parties called mine developer-cum-operator (MDO)/mine managers.
 
Ironically, competitive bidding-based selection of MDOs serves as a compelling rationale for auction of coal blocks. If bidding can open jackpots for CBAs, why should states not reap a windfall by forcing the Centre to resort to auctioning?
 
All this analysis should convince CAG critics that the Centre has deprived the states of an opportunity to earn additional revenue since February 1997, when the Union Cabinet decided to auction coal blocks. 
 
Unfortunately, the CAG report has erred in listing this and other milestones in coal reforms. The report says: “Audit observed that in 2004, the concept of allotment through competitive bidding was first made public on June 28, 2004.”
 
It appears the Coal Ministry has not given all the documents on this matter to the CAG. In any case, the CAG could have found facts on the proposed auction of coal blocks from the Lok Sabha and Rajya Sabha websites.
 
 
Captive Coal Mining diluted to the core
 
Captivecoal mining (CCM) by power, steel and cement companies under guidelines announced in June 1993 is a misnomer. The dilution of the CCM concept virtually coincided with the start of coal block allocations.
 
One of the coal block allottees (CBAs), Nippon Denro Isplat Ltd (NDIL) of the Ispat group sought relaxation of the guidelines as two foreign investors in its 1082 MW power project at Umred in Maharashtra were not interested in making investments in coal mining. The company had floated another company, Central India Power Company Ltd (CIPCO), to set up the power project. NDIL had then suggested that the group should be allowed to float a new company, Central India Coal Company Limited (CICCO), to develop its three allotted coal blocks.
 
Official records show that NDIL forwarded to the Coal Ministry the legal opinion of senior Supreme Court advocates, Kapil Sibal, P Chidambaram, K K Venugopal, R F Nariman and G Ramaswamy, through a series of letter submitted during August-September 1994 in support of its request.
 
An official note says: “all the legal experts were unanimous in their opinion that a suitable Gazette Notification issued by the Central Government under Section 3(3) (a) (iii) (4) of the Coal Mines Nationalisation Act declaring that the supply of coal mined from the captive block by the coal company to the power company for the exclusive use of the latter will be the end-use for the purpose of this Act.”
 
The Coal Ministry later referred this legal opinion to the then Attorney General who concurred with this opinion. Later, NDIL submitted a proposal to form a holding company for the power and coal mining companies, CIPCO and CICCO. It proposed that the holding company, Ispat Urja Ltd, would hold 26 per cent stake in each of these two companies.
 
Foreseeing the possibility of receipt of similar applications, the Coal Ministry that took a first shot at the dilution of CPP guidelines by issuing a gazette notification on March 27, 1996. The CPP guidelines incorporated a special dispensation to provide for setting up of associated coal companies by coal block allottees. The guidelines say: “a company engaged in any of the approved end-uses can mine coal from a captive block through an associated coal company formed with the sole objective of mining coal and supplying the coal on exclusive basis from the captive coal block to the end-user company, provided the end-user company has at least 26 per cent equity ownership in the associated coal company at all times.”
 
The guidelines also provide for a holding company that can invest in the end-user company and in the associated coal mining company. The guidelines say: “There can be a holding company with two subsidiaries, i.e., a company engaged in any of the approved end-uses and an associated coal company formed with the sole objective of mining coal and supplying the coal on exclusive basis from the captive coal block to the end-user company, provided the holding company has at least 26 per cent equity ownership in both the end-user company and the associated coal company.”
 
A few years later the guidelines were further diluted. The liberalised guidelines enable a CBA to mine coal through a mining company for getting exclusive coal supplies, provided the CBA or the end-user company has a firm tie up with the mining company for supply of coal, supported by a legally binding and enforceable contract /agreement.

 

 
Answering a question in Rajya Sabha on March 10, 1997, the then Minister of State for Coal, Mrs. Kanti Singh, stated: “The Government have, subject to legislative changes, decided to offer new coal blocks to Indian companies, including public sector companies, on the basis of competitive bidding. The rules and regulations for such bidding are under consideration in consultation with the Ministries of Mines and Law.” The Government arrived at this decision on the basis of recommendations made by the Committee on Integrated Coal Policy (CICP) in May 1996.
 
This recommendation was echoed by the Parliamentary Standing Committee on Energy in its report on Coal Mines (Nationalisation) Amendment Bill 2000 submitted in August 2001. Taking note of the industry’s demand for transparency in coal blocks allocations, the House panel recommended that this job, including auctions of blocks, should be done under the supervision of an independent regulator.
 
Subsequently, several entities either recommended auction or need for transparency and objectivity in allocations. Instances include reports of the Expenditure Commission and the consultants that prepared the roadmap for coal reforms under a World Bank project in 2000.
 
These milestones do not find a place in the CAG report. Another crucial fact absent in the CAG report is ‘The Coal and Lignite (Regulation & Development) Act’. The Government drafted this bill in the late nineties to constitute an independent coal regulator but it never introduced this bill in Parliament.
 
Another fact overlooked by the CAG is that the Government has been playing around with different versions of the draft for the tendering competition over the last seven years! One draft tender document prepared in 2005 says: “The bidder(s) shall quote ‘production linked payment (PLP)’ as percentage of production year-wise and grade-wise to be shared with Government for the entire mine life.” Such payment is the same as the facilitation fee being mopped up by CBAs from MDOs.
 
For the truth about why the Coal Ministry delayed the take-off of coal blocks auction and allowed discretionary allotment requires a high-level probe. g
 

 

Comments :-
Alper
Sunday, May 27, 2012
While it's unrealistic in a siuroes way, keep in mind that for today's average pampered, underskilled, lazy, bureaucratic, service industry oriented loser that looks about as tough as it gets. for those of us who know what industry is really like, its one part joke, two parts safety infraction, and four parts pitiful.Its a real pity that the average person these days doesn't know the pride, accomplishment, and honour that comes from a difficult, or dangerous job done well and done safely. The average person doesn't step back at the end of the day and see the whole of their work. Average Joe doesn't point to a building and say I did the wiring for that building or I helped finish the Ironwork there. Average Joe doesn't build cars, fix cars, run powerstations, mine coal, fix trains, lay pipe, put up buildings, make furniture, paint, drywall, pour concrete, build boilers, mine for gold, grow food, raise cattle, fish, drill for oil, truck goods, defend their country, operate machinery, chop down trees, have new ideas, build computers, or EVEN GO CAMPING IN A TENT.These days, it seems to me that Average Joe spends most of his time pushing paper from one office box to another, and worrying that he may not be up to date with his friends on the latest reality tv. In my books, Average Joe is to be pitied And for myself, if you give me the choice between living every day trapped in a tiny box, or maybe being crushed under a rail car .. For myself, I've already chosen.

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