A messy business

Saturday is usually a slow news day. So when the Prime Minister’s Office (PMO) decided to issue a statement on a balmy weekend afternoon in August 2005, there weren’t too many journalists present. The previous month, prime minister Manmohan Singh had set up the energy coordination committee (ECC) under his chairmanship, and it had conducted its first meeting that morning. The PMO statement then, related to the ECC meeting — the PM was directly monitoring the country’s energy sector and would iron out issues in various energy-related sectors, with coal as priority.

The black hole

CAG’s loss calculation is based on 57 private underground mines

Hardly scintillating stuff, the meeting and the message were quickly forgotten — until seven years later, when Singh referred to another meeting, in July 2005, in his statement to Parliament after the Comptroller and Auditor General (CAG) slammed the government in a report on coal block allocation.

Last month, the CAG tabled in Parliament its performance audit report where it said that despite recognising the need for introducing competitive bidding for coal blocks, since 2004, these were handed over to companies on an allotment basis that lacked transparency and objectivity (See: Subjective allotment). The delay in introducing competition gave these companies an estimated undue benefit of #1.86 lakh crore, a portion of which would have gone to the exchequer (See: The black hole). 

Below the surface

But first, some background on the coal business in India. Until the 1990s, all coal had to be procured from Coal India or through imports. Then, an amendment in the Coal Mines (Nationalisation) Act (or loosely the Coal Act) allowed power, steel and cement companies (private and government) to apply for coal blocks for captive mining. The decision to allot coal blocks was taken by a screening committee comprising officials from the ministry of coal, other departments as well as inputs from state governments. When the UPA came to power in 2004, Shibu Soren was appointed coal minister.

Two months later, he resigned after an arrest warrant was issued against him. The prime minister took over the portfolio and continued to hold it for almost the entire UPA I tenure (although Soren came back twice, with the second stint from January till November 2006). Day to day matters, though, were overseen by the minister of state for coal, Dasari Narayan Rao.

Subjective allotment

The allocation of captive mines gathered pace closer to the end of UPA’s first term

For a year from July 2004, when Singh took charge, several notes were exchanged between the coal secretary, MoS Rao and the PMO on auctioning versus allocation. Auctioning meant amendments in the Coal Act, which trade unions were already dead against. (In 2000, the BJP government tabled a bill in the Rajya Sabha seeking an amendment to the Coal Act and allow commercial mining of coal; it was never cleared.) Allocation meant continuing with screening committees and linkage committees, which then-coal secretary PC Parakh was vehemently against. According to him, which has also been brought out in the CAG report, this norm of allocation “was subject to various pulls and pressures” and that “even with modifications, the present system of allocations would not achieve the objective of transparency.”

Parakh continued pushing for auctioning, despite resistance from the minister of state and, in a turn of events, even the PMO. Indeed, in September 2004, the PMO was the one to highlight the disadvantages of following the auction route, followed a month later by minister Rao, who said amending the Coal Act would be difficult. Meanwhile, the decision was taken to fix June 28, 2004, as the cut-off date for giving mines on allocation basis.

By November, the idea of issuing an ordinance to amend the Coal Act was dropped; instead, the decision was taken to introduce a proper Amendment Bill in Parliament. All these changes were incorporated in a fresh Cabinet note and a month later, the government also constituted an expert panel under TL Shankar to create a blueprint for coal sector reforms, which included putting Coal India on a sound footing. By February 2005, when the revised Cabinet note had been circulated, the prime minister himself was against amending the Coal Act, well knowing the resistance he would face on the issue --— after all, the Left had made its views on several reform measures very clear. Disinvestment was virtually a no-go and several financial reforms were also facing the Left’s ire. The thinking in the UPA camp, why rock the boat further with coal reforms?

Sorry state of affairs

To make matters worse, when opinion was sought on auctioning coal blocks, states started voicing their objections. Between March and July 2005, almost all coal-bearing states spoke out against auction of captive coal blocks. Chhattisgarh’s chief secretary said bidding would result in “substantial increase” in the cost of coal and companies without captive blocks could become “non-competitive and thereby unviable”. West Bengal’s chief secretary worried that the new system would lead to concentration of industries in a particular state whereas in the allotment process, views of the state government are considered and it takes care of decentralisation of industries. 

Money transfer

Coal India’s inability to meet demand saw private players prosper

Vasundhara Raje, the then-chief minister of Rajasthan, felt competitive bidding would take away the state’s prerogatives; her fear was that successful bidders might mine in a state but put it to use outside. And Odisha’s commissioner-secretary objected that his state wouldn’t be able to leverage their reserves to accelerate development. 

Now, technically, there was no need for the Central government to ask the states — mining is a subject on the Central list, (although states with mines get royalty). But this was a coalition government, which had already been shaken by the Left’s stance on major economic reforms. And then on July 4, Rao cautioned the prime minister that there was “great reluctance” on the part of most power utilities to participate in competitive bidding due to cost implications. 

So, when the July 25, 2005 meeting  (prior to first meet of ECC in August 2005) took place, the PMO’s decisions wouldn’t have come as too much of a surprise. Yes, amendment of the Coal Act was needed to bring in competitive bidding, but such a process would take time. In the meanwhile, given the mounting applications for captive mines, it was decided to continue with the screening committee route. Says a senior government official who was in the PMO at the time, “The PM had to take a holistic view on the matter before arriving at a decision. While on one hand, there was talk of double-digit growth but, on the other, the mining sector was becoming a laggard.”

Incidentally, when the committee submitted its proposals in December 2005, it also said the existing mechanism of mine allocation was perfectly fine. “We did not oppose competition [or auctioning],” says TL Shankar, who headed the committee. “We said the existing policy [of allocation] needs to be made stronger.” 

Minefield of inefficiency

But the trouble in the energy and coal sectors was not just about allotment versus auctioning. There was a dire need to augment coal production and crack the whip on Coal India. The monopoly controlled most of the mines in India but was abysmally slow in developing them. Former director of National Thermal Power Corporation (NTPC) Chandan Roy says from the day Coal India gets the go-ahead to mine a new block, it takes an average 17-18 years to reach peak production. In sharp contrast, international companies like Rio Tinto and BHP take around five to seven years. 

In October 2005, at the third ECC meeting, the PM set up a group headed by the coal secretary to monitor and expedite the implementation of Coal India’s investment plans — it had 15 new projects with an incremental capacity of 87.2 mtpa to be approved by March 2006. The ECC also came down on idle captive mining licences —  the CAG audit points out that for the 11th Plan, 86 blocks were to start production but only 28 (of which 15 were private) did. Incidentally, in October 2007, the PM deallocated 18 Coal India blocks, the single-largest such dereservation, since plans weren’t made to open these mines and that would hold back power capacity addition.

These blocks had the potential to generate 68,000 MW of electricity. It was also disclosed that instead of waiting to amend the Act, competition could be introduced by amending the Mines and Minerals (Development and Regulation) Act (MMDRA), which would “provide for competitive bidding of all minerals including coal and lignite”. 

In January 2006, Soren returned to the coal ministry and at a PM’s meeting, stressed the need to bring in private investment. The now cautious prime minister warned him of the government’s need to get political consensus on moving ahead with an amendment to the Coal Act. But in a way, the proposed amendment to the MMDRA would be tougher — since it went beyond coal, the changes needed a okay from the mines ministry as well as various states.

Even as these clearances were awaited, the department of legal affairs gave an opinion that auction could be introduced by amending the administrative instructions. And that’s where the CAG’s criticism of the government stems from: that it could have brought in competition in 2006 itself. There’s precedent in the government for making changes in administrative instructions while simultaneously pushing for amendment in the law — that’s how service tax was introduced in the early 1990s. 

Though the prime minister disagrees with CAG’s observations on administrative instructions, it still took the UPA two years to introduce the bill to amend MMDRA. It was placed in Parliament in October 2008 under UPA II and was passed another two years later. It took another almost two years to iron out all the technicalities of the bidding process and ways to protect the power sector from coal price variations.

Meanwhile, as the policy of captive coal block allocation continued, there was a flood of applications. For instance, in August 2007 alone, there were as many as 745 applications for 15 coal blocks, says a former coal ministry official. These included 36 companies that had already applied for and were allocated coal blocks for different end-uses — companies like Jindal Steel & Power, which had four blocks; West Bengal Power Development Corporation, which had five blocks; and Karnataka Power Corporation, which had six blocks.

Now what?

The bidding norms for captive coal mines were announced on February 2, 2012. But several issues remain. First, mines for power plants will not be subject to auction as power plants come through competitive bidding. The issue of power plants with captive mines that sell in the merchant market, however, is yet to be addressed satisfactorily. More importantly, in the absence of a coal regulator, who will monitor what goes on in these blocks? Who takes decisions, for instance, on capex? Earlier, the inter-ministerial group monitored the progress on coal blocks — it’s not clear who will take the onus now. Says Vinayak Chatterjee, chairman of infrastructure services company, Feedback Ventures, “Auctioning is perfectly fine, but there is an urgent need for a regulator who will fix prices that are fair to all stakeholders.” 

All of which are issues that can be resolved in due course. What’s significant is that the government finally stopped its dilly-dallying and took steps to introduce competitive bidding in coal blocks. Or has it? The first auction is still to take place. Now that will be a big news day, whenever it happens.