Canaries and coal mines

Vivek Kaul

Music has got its share of one hit wonders. Delhi born singer and musician Peter Saerdest fits that category. His most famous claim to fame being the 1969 hit “where do you go to (my lovely)”.
The song is about a fictional girl called Marie Clare. There is a paragraph in the song which brings out the unhappiness in her life. Here is how it goes:
But where do you go to my lovely
When you’re alone in your bed
Tell me the thoughts that surround you
I want to look inside your head, yes i do
Now this is a question that I have been wanting to ask the Prime Minister (PM) Manmohan Singh as the country moves from one scam to another. What are the thoughts that go inside his head? The forever quiet PM finally obliged us when he issued a statement on the coal gate scam and put the blame on his predecessors and the Comptroller and Auditor General(CAG) of India, for coming up with a loss number of Rs 1.86 lakh crore.
The policy of the government allocating coal blocks for free was introduced in 1993, and so it was not right to blame the Congress led United Progressive Alliance (UPA) felt the Prime Minister. Fair point, one must say.
But as the numbers calculated by the international stock brokerage CLSA show a major part of the coal blocks were given away for free only after the Congress led UPA came to power in May 2004. Of the 100 coal blocks given away free to government companies between 1993 and 2011, 83blocks were handed over after 2003. The same stands true for private sector companies where 82 out of the 106 blocks were allocated after 2003.
So while it might be true that UPA did not start the policy but what Manmohan Singh cannot deny is that they went around implementing it with a vengeance. The geological reserves of the coal blocks given away for free amounted to around 41billion tonnes. The total geological reserves of coal in India amount to around 286billion tonnes which means 14% of it was given away for free.
Hence, the question that the PM still needs to answer is that why was there a sudden increase in the allocation of blocks between 2004 and 2009, and especially during his tenure as the coal minister between 2006 and 2009?
The answer might most probably lies in the price of coal which started to shoot up around the time UPA first came to power. Prices shot up from around $30-40 per tonne to around $190 per tonne internationally in mid 2008. The conclusion that one can draw from this is that before 2004 it was cheap to just buy coal off the market. But after that things changed and it made more sense for companies to have direct access to coal.
The PM in his statement has also claimed that the loss number of Rs 1.86 lakh crore arrived at by the CAG can be questioned on a number of technical points.
The CAG has calculated the loss number based on certain assumptions. It has only taken into account mines given to private sector companies for free. Those allotted to government companies have been ignored. Underground mines have also not been taken into consideration.
So these assumptions work in favour of the government. If the government blocks had also been taken into account the loss number would have dramatically shot up. It need not be said that the PM does not talk about this anywhere in his statement.
The extractable reserves of these private sector coal blocks come to 6282.5million tonnes of coal. This is the amount of coal that the CAG feels could have been mined and sold and has been given away for free. The average benefit per tonne of this coal was estimated to be at Rs 295.41.
As Abhishek Tyagi and Rajesh Panjwani of CLSA write in a report dated August 21, 2012,”The average benefit per tonne has been arrived at by first, taking the difference between the average sale price (Rs1028.42) per tonne for all grades of CIL(Coal India Ltd) coal for 2010-11 and the average cost of production (Rs583.01) per tonne for all grades of CIL coal for 2010-11. Secondly, as advised by the Ministry of Coal vide letter dated 15 March 2012 a further allowance of Rs150 per tonne has been made for financing cost. Accordingly the average benefit of Rs295.41 per tonne has been applied to the extractable reserve of 6282.5 million tonne calculated as above.”
Using this method CAG arrived at the loss figure of Rs 1,85,591.33 crore (Rs 295.41 x 6282.5million tonnes) or around Rs 1.86 lakh crore. Analysts who track coal believe that assuming a profit of Rs 295.41 per tonne is a fairly conservative estimate.
In fact as has been reported elsewhere, if the e-auction prices of coal would have been considered, the losses would have been at Rs 11.2lakh crore. And if the calculations had been done using the imported coal prices the losses would amount to Rs 18lakh crore. These are huge numbers. The total expenditure of the government of India for the year 2011-2012 was estimated to be at around Rs 13.2lakh crore.
Another bogey that has been raised by the sympathizers of the Congress party (not by the PM) is that coal is a natural resource and hence cannot be “auctioned” or sold at a market price. What they forget to tell us is that coal is a limited natural resource and hence it needs to be priced correctly and not given away for free. If that was not the case why does the government price products like petrol, diesel, telecom spectrum etc? These products are also either natural resources or derivatives of natural resources. Why does Coal India Ltd sell coal at a certain price? Why not give it away for free?
By giving away coal blocks for free the nation has faced huge losses. Whether its Rs 1.86 lakh crore or Rs 18 lakh crore is a matter of conjecture, but that does not take away the fact that losses have been huge. Given this, the PM and the Congress party, are just trying to practice the old adage: “if you can’t convince them, confuse them”.
(The article originally appeared on Asian Age/Deccan Chronicle on September 2,2012.
(Vivek Kaul is a Mumbai based writer. He can be reached at [email protected])