Coalgate?

First published on 24.08.2012

For the last one week or so, the only thing I have been hearing on the TV news channels is “Coalgate”, therefore I have used the same heading but also placed a question mark. The question mark because I am less than unsure – more or less convinced – that there is no scam as such in the coal block allocation; however, my opinion is based on giving benefit of doubt to the UPA government, so there is a question mark.

The main allegation against the government is that the allocation of coal blocks to the private parties has lead to a loss of Rs 1.84 lac crore to the exchequer. Well, this statement is factually wrong: the CAG has not quanitified any losses to the exchequer; it has only mentioned Rs 1.84 lac crore as the profit which the 57 opencast mines and the opencast portions of the mixed mines would have made if the coal was sold in the open market at Coal India’s prices. The contention of the CAG has been answered by the government at page no. 39 of the CAG report. The main claim of the government is that the coal allocation was for captive mining, not commercial exploitation, and, therefore, the inference of the CAG that the government wanted to tap a part of the financial gains to the private players by introducing competitive bidding, is wrong. The CAG has countered it by referring to the statement dt. 25.07.05 of the Coal Secretary in a PMO meeting to the effect that the competitive bidding would tap a part of the profit accruing to the private players in the then existing process of coal allocation; based on the above counter-argument plus a further argument deliberated in the said PMO meeting that, unlike the government, the private companies won’t have social overheads and excessive man power costs, the CAG has reached a conclusion that had competitive bidding been introduced, a part of Rs 1.84 lacs crore notional profit to the private players would have accrued to the government. But, this is not the issue being discussed in the news channel debates. In fact, this is too technical an issue to be discussed by the emotive news debaters. And, this is also not the issue that needs to be discussed. There can’t be any dispute that private players if allowed to sell coal in the open market would make windfall profit in the impugned coal allocation process, but this is only a hypothetical situation; therefore, lots of factors need to be taken into account in order to calculate losses, if any, to the exchequer — the CAG’s exercise of calculating a notional profit figure for the private players, and then speculating notional losses to the exchequer on the basis of the same, is a speculative report no research scientist worth his salt would ever publish, and any journal publishing such speculative report would publish it as its last report, but, it seems, anything can be published in the Indian parliament.

However, there are also some very important issues that need discussion:
1. Why the NDA/BJP/Left rejected the proposal for competitive bidding? Is competitive bidding really that good?
2. Will competitive bidding eventually lead to de-nationalization of coal mining sector? If yes, what are its repercussions?
3. Has UPA-II commited a blunder by introducing competitive bidding? Are there ways other than competitive bidding for bringing in transparency in coal allocation/natural resources allocation?

It can not be disputed that a transparent process was not followed in the coal allocation process, which needs to change. Another issue emerging from the CAG report is the inability of the private players to produce coal, whereas CIL, more or less, achieved its targets — in fact, CIL wanted its reserves not being de-reserved for the private sector, and the CAG has also raised question marks wrt the de-reservation. The CAG report has certainly raised a very important issue of bringing in transparency, but it might have just faltered in recommendating transfer of a part of the profit of the captive miners to public.

From whatever I have read in the CAG report, it seems that the irregularities in coal allocation occured mainly because of the arbitraryness writ large in the coal allocation to the private players through the screening committee route, thus detailed regulations for the allocation of coal was all that was required — I wonder why team Anna has not gone to the courts to get the allocation cancelled on the ground of arbitrariness in the allocation process. Competitive bidding is not an answer to bad/arbitrary governance.

Comment dt. 31.08.2012
It is just not understandable: If the private players have not been able to produce anything till date and have already breached their time commitments, why can’t their licenses be cancelled immediately? It is not the concern of the public why a private player couldn’t honor its time commitments: the private players ought to have contemplated the bureaucratic hurdles in getting approvals. And, if the government insists on retaining the existing coal allocation contracts, eyebrows will surely be raised, and the government will have to answer a lot. As far as the credit lending from the banks to the licensees is concerned, the banks can go to hell if they don’t know how to manage their credit risks. The whole Indian system needs to change.

Comment dt. 03.09.2012
Mr. Sibal, in an interview to Barkha Dutt, states there is nothing wrong in the inflated valuations of the companies having been allocated coal blocks, as this is how the business works. He is wrong! This is not how the business works; this is how the markets work, where intelligent investors/speculators make huge profits from the imperfections in the markets, which, in India, are almost always imperfect valuing companies either too high or too low. The problem arises when the other systems become dependent upon the markets; i.e., when banks start lending to the business purely on the basis of market values, without any independent assesment. It seems the Indian banks have lent huge sums of money to the coal companies on the basis of their inflated valuations post the grant of licenses, and, it seems, some transfers have also been made. As far as the transfers are concerned, there is no question of taking any lenient view: the transferees need to absorb losses. And, as far as the banks are concerned, then also, I think, there is no occasion to take a lenient view: If some banks would suffer huge losses in the case of coal-allocation cancellation, which might put the financial system at risk, then also nothing changes: It only hints a scam in the financial sector; if it is so, so be it; let people know the truth.

©2012 Ankur Mutreja

About the Author

Ankur Mutreja
Ankur Mutreja is an advocate-cum-writer, and his blogs are amongst his modes of expression. He has also authored number of books, which can be downloaded from the links on the top menu.

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