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Auction, allocation & the coal mess

What's the recent controversy- auction, allocation & the coal mess-all about? Gaurav Choudhury reports. FSFC policy de-coded

business Updated: Aug 22, 2012 01:23 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times

What's the recent controversy all about?
According to a Comptroller and Auditor General (CAG) report, which was tabled in Parliament last week, 25 private companies primarily in the steel and power sector, unduly benefited from the allocation of 57 coal blocks.

How were the coal blocks allocated?
The CAG report said that the move benefited the companies by allocating them 57 coal blocks without auction. The delay in introduction of the process of competitive bidding has rendered the existing process beneficial to private companies. According to CAG estimates, private companies may have gained to the tune of Rs. 186,000 crore (based on average cost of production and average sale of price of opencast mines of Coal India Ltd (CIL) in 2010-11). The national exchequer could have earned a part of this if the coal blocks were allotted in a transparent auction-based system.

What has the CAG observed?

CAG has observed that the procedure followed for allocation of coal blocks to captive consumers lacked transparency as the allotments were made merely on the basis of recommendations from state governments and other administrative ministries without ensuring transparency and objectivity.

Why didn't the government call for bids?

The Centre said state governments had opposed a process of bidding. The government said that the allotment of coal fields was done in a transparent manner and that, not a single block was allotted without the consent of the state governments.
What is the current process of allotting coal blocks?

Coal fields are currently allocated by a screening committee. Interested firms are ranked on the basis of different parameters such as land and environmental clearances. According to coal minister Sriprakash Jaiswal, the UPA-I government started the practice of awarding coal blocks through advertisements, discontinuing the earlier practice. He said that between 1993 and 2004, scores of coal blocks were awarded without issuing any advertisements.

How different or similar is this to the 2G spectrum scam?
In the 2G spectrum (radio frequency) scam, telecom licences and spectrum were granted in 2008 at 2001 prices and some of the companies were accused of divesting equity at significantly higher prices. The government was charged with awarding licences to telecom firms arbitrarily and granting 2G spectrum at extremely cheap rates robbing the government of revenues.

What is the status on introducing auction method for awarding coal blocks?
The proposal for allocation of coal blocks through competitive bidding was mooted for the first time a couple of years ago. The government is framing guidelines and rules for the proposed competitive bidding for auction of coal blocks.

What has the CAG recommended?
The CAG has said that there is a need to constitute an empowered group along the lines of Foreign Investment Promotion Board (FIPB) as a single window mechanism with representatives of central nodal ministries and states governments to decide on mining lease, mining plan, forest clearance, environment management plan and land acquisition for accelerating the procedures for commencement of production.

Is awarding natural resource to the highest bidder through an auction always the best method?
In allocation of natural resources, it is not always the best method to offer the resource to the highest bidder. Public purpose may demand a different use of the resource from what the market may put it to. Auctions favour large corporations.

After all, there is the other side of the argument that an auction would raise power tariffs and that, not all coal blocks are profitable or commercially viable. Therefore, in certain cases, governments across the world use non-market based processes such as the first-come-first-served (FCFS) policies to allocate natural resources.

First Published: Aug 21, 2012 21:10 IST