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It’s become a minefield

The apex auditor’s estimate of the exchequer’s coal block losses is frivolous. It must come clean on the basis of such a calculation, writes Nantoo Banerjee.

india Updated: Apr 04, 2012 01:05 IST
File-photo-A-labourer-works-inside-a-coal-yard-on-the-outskirts-of-Ahmedabad-Reuters
File-photo-A-labourer-works-inside-a-coal-yard-on-the-outskirts-of-Ahmedabad-Reuters

The auditors at the office of the Comptroller and Auditor General of India (CAG) appear to be far from being correct in their estimation of losses to the UPA government due to the arbitrary allotment of 155 coal acreages between 2004 and 2009. The draft CAG report may be short on reliability and high on creating sensation.

The draft report's “conservative estimate” first puts the losses to the exchequer at Rs 6.31 lakh crore “based on prices prevailing at the time of allocation on a constant cost and price basis and as on March 31, 2011.” The losses to the exchequer are being naturally projected as the gains to the allottees — Rs 2.94 lakh crore by all private sector companies and a total of Rs 3.37 lakh crore by the public sector units.

The report also re-estimates the losses to the government at Rs 10.67 lakh crore at current prices, which means an almost 65% jump over the earlier estimate. If compared, the presumptive loss on account of the 2G spectrum allocation at Rs 1.76 lakh crore would appear to be unimpressive.

There is no doubt that arbitrariness breeds favouritism and encourages corruption and must be avoided at any cost. An allotment of coal blocks for mining among bidders through auctions would have been in the best interest of both the government and industry, seeking coal linkage to power, steel and cement plants.

Given the experience of the old licence-permit raj, it may not be beyond suspicion that most private allottees of coal blocks may have paid some ‘consideration money’ to bureaucrats, allotment committee members and influential politicians to ensure that they get blocks bearing better varieties of coal.

However, there was no guarantee that a coal block auction would have fetched the exchequer a lot more money, if not the astronomical amounts the CAG auditors are referring to. Chances were that the coal acreage auction could have fetched even less money in case the bidders formed a syndicate to force a lower bid price. Such an auction could have flopped if the government had fixed a higher base price. The coal mining business is not the same as the telecom business. There is not much money in mining poor quality domestic coal, regarded among the worst in the world.

Few world mining corporations would like to try their luck with coal mining in India even if raw mine blocks are awarded free. Coal mining is highly capital and labour-intensive. Profitability depends not on the quantum of reserves, but on its quality and the depths at which it is available. Nearly 90% of Indian coal has very high ash content — 40 to 50% — compared to the internationally tolerable limit of below 9%.

Did the CAG, while making ‘conservative’ valuation of coal blocks allotted to those prospective Indian end-users, take into account the quality of coal that these blocks are likely to produce? How did they know how much ash and shell the mined slabs from various blocks would bear? What would be the ultimate cost of raisings and life of those mines under optimum use? What are the views of experts from the Geological Survey of India (GSI) on these issues? Why did Coal India Limited (CIL), a Maharatna PSU, take this long to produce less than 460 million tonnes of coal per year while China produced nearly 3.5 billion tonnes last year?

According to GSI, India has the world’s largest reserves of coal, 286 billion tonnes as of April 1, 2011. However, the GSI estimate has few takers. China, the world's largest coal producer, has an estimated reserve of 200 billion tonnes.

One does not know if the auditors had gone into the depth and details of how CIL makes profit and the reasons behind its earlier losses. The profit comes mostly from CIL’s opencast mines at depths well above 200 metres. Huge deposits at depths between 200 and 300 metres remain untapped because of high raising costs, which would have eaten away much of CIL’s profits. Are the auditors aware that 60% of gross geological coal resources in India lie at a depth within 300 metres?

The CAG auditors would have done well by going into the aspects of the scientific mining process and suggest that the government set stringent extraction norms for the new allottees of coal blocks and emphasise on investment in equipment rather than taking the allocation system as a tool to quickly generate large revenues. The nation stand to lose much from the waste of natural resources by undermining and indulging in unscientific mining to make quick profits. It is for this reason the government had nationalised private coal mines four decades ago for scientific utilisation of diminishing national mineral resource.

The CAG's suggestion that the government lost Rs 10.67 lakh crore out of the allotment of 155 coal acreages is frivolous, to say the least. The CAG must come clean on the basis of such a calculation. Moreover, is industry capable of coughing up CAG-estimated amounts to take the lease of those mine blocks? Industry would be probably better off with imported coal or buying ready mines. Industry will have to continue importing coal while it makes large investments in developing newly-leased domestic mines. The generation of such large funds is the real challenge before the new allottees.

For the allotment of coal blocks to industry, the government should have gone for the auction route as well, though there was no guarantee that the national exchequer would have been substantially richer in the process.

Incidentally, the department of coal had done some fairly good background work to ascertain the true value of those raw mine blocks by using sound techno-economic parameters and also considering ground realities. The real issue is if some undeserving parties were favoured in the allotment. Corrupt elements in the government can manipulate any system to make money. There could well be errors or corruption in the auction system as it is alleged in the allotment of off-shore oil blocks to certain private parties. Being the super auditor, CAG has to be more careful about its investigation and intent. Its best reward is upholding public trust and not fomenting public controversy.

(Nantoo Banerjee is consulting editor of India Press Agency and author of The Price: When Bookkeeping Means Bookcooking)

The views expressed by the author are personal