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july 14, 2012

Economic & Political Weekly EPW july 14, 2012 vol xlviI no 28 7

Coal for a Song

What does one make of the draft CAG report on the allocation of coal blocks?

Corruption, in official parlance, simply refers to payments in

kind or in monies over and above official emoluments

gratification that a holder of public office or a state

employee receives for services rendered. So, for example, only

the value of the gratification alleged to have been earned by

A Raja when he was minister for telecommunications and

information technology in 2008 for deliberately issuing 2G spec-

trum licences in a dubious first-come-first-serve manner based on

2001 prices rather than in an open auction process, is corruption.

But such gratification, if at all, could, at most, only be a small

fraction of the revenue forgone by the state, the latter, estimated

by the Comptroller and Auditor General (CAG) at Rs 1,76,645

crore, which is based on a presumptive value of what the state

could have realised had it gone in for an open auction to allocate

the 2G spectrum licences. Now, surely this estimate is open to

question and dispute, but the real issues should not be lost sightof a dubious allocation process and failure to realise tens of

thousands of crores of rupees of revenue that could have accrued

to the exchequer from the sale of a state asset. What then does

one make of the more recent (leaked) draft performance audit by

the CAG that brings to light the irregular and arbitrary allocation

of blocks of already explored coal deposits to public and private

sector firms between 2004 and 2009, instead of openly auction-

ing them to the highest bidder? Here it is not merely just a

union cabinet minister who is allegedly responsible but Prime

Minister Manmohan Singh himself who, practically all through

the relevant period, held charge of the Ministry of Coal.

Yes, Prime Minister Manmohan Singh was also minister of coal

from late May 2004 and almost right through the term of the

first Congress-led United Progressive Alliance (UPA) government

and also, again, from late May 2009 when the UPA won a second

term in office until a cabinet reshuffle in January 2011. He would

have known, soon after he took office, that there was going to

be a substantial difference between the price of coal as supplied

by the public sector enterprise Coal India and the cost of produc-

tion of coal from the (to be) acquired captive mines of merchant

power plants set up by independent power producers, cement

and steel plants, but he did not seem to agree that the Indian state

as the legal owner of the natural resource on behalf of its citizensshould make sure that a significant part of such benefit accrued

to them. In its draft performance audit of the privatisation of

coal blocks, the CAG has come up with two estimates of the

windfall gains estimate one, Rs 6.31 lakh crore (public sector

enterprises Rs 3.37 lakh crore and private parties Rs 2.94 lakh

crore) based on prices prevailing during the year of allocation

on constant cost and price basis, and estimate two, Rs 10.67 lakh

crore (public sector enterprises Rs 5.88 lakh crore and private

parties Rs 4.79 lakh crore) if the price prevailing on 31 March

2011 is considered. In both cases, the difference between the

price of coal and its cost of production is multiplied by 90% of

the geological reserves to arrive at the estimate of the gains.

These estimates, as those in the 2G licence case, are open to

question and dispute. The Ministry of Coal has responded by argu-

ing that the coal produced from the captive blocks was not for

sale on the market and, anyway, out of the 137 blocks, 62 were

allocated to public sector enterprises. Further, out of the remain-

ing 75 blocks, 17 were given to power sector firms where tariff isregulated on the basis of input costs and the transfer price of coal is

assessed on actual cost basis. In the case of the steel and cement

sector firms, the Ministry of Coal claims that a competitive

market ensures the best benefit to consumers. But the CAG has

held its ground. It quotes from the recent Supreme Court judgment

on the 2G spectrum case to the effect that the State legally owns

the natural resources on behalf of its citizens and...[these

resources] cannot be allocated to private hands without ensuring

that the benefit of the low cost of the natural resources would be

passed on to the citizens. TheCAG draft also states that the Central

Electricity Regulatory Commissions (CERC) tariff regulations are

not applicable to merchant power plants set up by Independent

Power Producers, and, anyway, the CERCs tariff regulations allow

normative operation and maintenance expenses for coal and lig-

nite fired generating stations as against the actual cost of the

production of coal. In the case of the steel and cement firms,

the draft report argues that competitive market forces cannot

ensure that the firms allotted the coal blocks would pass on the

benefit of low cost of natural resources to the citizens.

Now, to make way for competitive bidding for the blocks in

question, all the Ministry of Coal had to do was put in place the

relevant rules under the Coal Mines (Nationalisation) Amendment

Act of 1993, but it preferred to continue to allocate the blocks bymeans of the Screening Committee in an opaque and subjective

manner, allowing substantial windfall gains to the businesses to

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EDITORIALS

july 14, 2012 vol xlviI no 28 EPW Economic & Political Weekly8

whom the blocks were allotted. Moreover, for its Sasan (Madhya

Pradesh) Ultra Mega Power Plant, Reliance Power of the Anil

Dhirubhai Ambani Group was allotted geological reserves of

coal far in excess of that plants requirements and in a manner

that entailed huge losses to Northern Coalfields, a subsidiary of

Coal India. Some of the private parties to whom huge windfall

gains will accrue are Tata Power, Tata Steel, Essar Power,

Hindalco, Adani Power, GVK Power, ArcelorMittal, BALCO andSterlite Energy (the latter two, part of the Vedanta Resources

business group), among others.

Essentially, Prime Minister Manmohan Singh allowed the already

discovered coal deposits to be given to private sector companies,

including subsidiaries of ArcelorMittal and Vedanta Resources

controlled by billionaires Lakshmi Mittal and Anil Agarwal

respectively, at prices way below what a fair competitive bidding

process would have fetched. The windfall gain of around Rs 4.8

lakh crore to the private companies represents a loss to the citi-

zens of India; this money could have been spent for their welfare

but was diverted to private pockets. Now, even if no bribe was

paid, the loss to the people as a result of this privatisation of thealready discovered coal deposits remains. Indeed, it constitutes

a regressive redistribution of wealth from the citizens of India

to a whole host of private companies, including transnational

corporations like ArcelorMittal and Vedanta Resources.