Vivek Kaul
In the year 2011-2012 (i.e. the period between April 1, 2011 and March 31, 2012) India produced around 540million tonnes of coal. This was 1.36% more than the amount produced in 2010-2011 (i.e. the period between April 1, 2010 and March 31,2011).
Of the 540million tonnes Coal India produced around 436million tonnes or a little over 80% of the total coal produced in India. The remaining was produced by Singareni Collieries Company and a host of other small companies.
This production wasn’t enough to meet the demand for coal in India. Hence, India also imported 99 million tonnes of coal during the course of the year primarily from countries like Australia, Indonesia and South Africa.
The amount of coal, India has been importing has been growing significantly over the years (as can be seen from the table below). What also comes out clearly is that the amount paid for importing coal grew at a much faster rate than the amount of coal imported between 2003-2004 and 2008-2009. This was the period when the international prices of coal were rallying and touched $190 per tonne in mid 2008.
Coal Imports In Million tonnes In Rupees crore
1999-2000 19.7 3548
2000-2001 20.9 4053
2001-2002 20.5 4536
2002-2003 23.3 5028
2003-2004 21.7 5009
2004-2005 29 10266
2005-2006 38.6 14910
2006-2007 43.1 16689
2007-2008 49.8 20738
2008-2009 59 41341
2009-2010 73.3 39180
2010-2011 68.9 41550
2011-2012 98.9 45723*
*from April-Oct 2011
Source: Provisional Coal Statistics 2011-2012, Coal Control Organisation, Ministry of Coal
Why this was not par for the course
All this would have been par for the course if India did not have enough coal reserves. Like is the case with oil. We don’t have enough known reserves of oil and hence we don’t produce enough oil to meet the demand. So we import oil.
But as numbers for the Geological Survey of India indicate as on April 1, 2012, India had 293.5billion tonnes of coal reserves. These reserves are referred to as geological reserves and are for valid for a depth between 0.9 metres and 1200 metres.
Not all of these reserves can be mined. Open cast mining of coal typically goes to a depth of around 250 metres below the ground level whereas underground mining goes to a depth of around 600-700 metres.
The amount of coal that can be extracted is referred to as extractable reserves. PC Parekh, a retired IAS officer in a presentation puts the extractable reserves at around 60billion tonnes. (You can access the presentation here). A few other experts this writer spoke to said that this number could be significantly higher.
But that’s beside the point. What this clearly tells us is that India has enough coal to mine unlike oil. Given this, India should not be importing the nearly 100million tonnes of coal that it did during the last financial year.
So then why is India not able to mine enough coal? The simple answer is that Coal India which is the biggest producer of coal in the country is not able to produce enough coal. One look at the following table clearly proves that.
Year Production (in million tonnes)
2011-2012 436
2010-2011 431
2009-2010 415
2008-2009 400
2007-2008 372
2005-2006 348
2004-2005 371
Average 396
Source: Coal India
Why coal blocks were given away for free
Between 2004-2005 and 2011-2012, the total coal production has increased by 17.5% or at a miniscule rate of 2.3% per year. The slow increase in the production of coal did not help given that India has been second the fastest growing economy in the world for a while now. Hence, the energy needs of the country have been growing as well. This meant greater demand for coal. A study published in 2011 shows that coal is used to meet 40% of India’s energy needs against the global average of 27%.
What did not help was the fact that between 2004-2005 and 2008-2009 there was a rally on in global commodity prices as China expanded at breakneck speech gobbling up commodities from all over the world. Hence, the price of coal shot through the roof. The international price of coal was a little over $20 per metric tonne in mid 2003. It shot up to around $40 per metric tonne in mid 2005 and kept rising after that. Prices shot up to around $190 per tonne internationally in mid 2008.
Given these reasons the government felt that there was a need to look beyond Coal India. In fact, the inability of Coal India to produce enough coal was the main reason why The Coal Mines (Nationalisation) Act 1973 was amended with effect from June 9,1973, to allow the government give away coal blocks for free.
The Economic Survey for 1994-95 points out the reason behind the decision. “In order to encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973 was amended with effect from June 9, 1993 for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector,” the survey points out.
The total coal production in the country in 1993-94 stood at 246.04million tonnes having grown by 3.3% from 1992-93. The government understood that the production was not going to increase anytime soon because the newer projects were having time delays and cost overruns. As the 1994-95 economic survey put it “As on December 31,1994, out of 71 projects under implementation in the coal sector, 22 projects are bedeviled by time and cost over-runs. On an average, the time overrun per project is about 38months.There is urgent need to improve project implementation in the coal sector”.
Even though the decision to give away coal blocks for free came into effect in 1993, nothing much happened till 2004. Between 2005 and 2009, the government of India gave away 149 coal blocks for free. This was also the time when the global rally in coal prices was on and the Indian demand for coal was also on its way up. The conclusion that one can draw from this is that before 2004 it was cheap for a company to import coal because international coal prices were low. But after that things changed and it made more sense for companies to have direct access to coal.
But giving away the coal blocks for free did not solve any problem. As per the report prepared the Comptroller and Auditor General of India, as on March 31, 2011, eighty six of these blocks were supposed to produce around 73million tonnes of coal. Only 28 blocks have started production and their total production has been around 34.6million tonnes, as on March 31,2011.
Why Coal India cannot increase production at a faster rate
In all this, the question that nobody seems to be asking is that why is Coal India not able to produce enough coal? It has probable reserves of around 18.9billion tonnes, but is still unable to expand production at a higher rate.
If I was a television journalist I would say that Coal India has been unable produce more simply because it is inefficient like most Indian public sector companies. But the truth is a lot more complicated than that. And it to a large extent explains why the government’s decision of giving away coal blocks for free hasn’t worked.
India’s coal reserves are largely concentrated in the middle of the country in the states of Jharkhand, West Bengal, Odisha, Madhya Pradesh, Chattisgarh, Maharashtra and Uttar Pradesh. There are some reserves in the North East as well, but they are at best miniscule. It does not help that the states that have the biggest coal reserves are also dealing with naxalite problem. Hence operating in these regions isn’t very easy.
A lot of the coal reserves are also in regions categorized as forest areas and getting clearances from the state governments isn’t always easy. What also has not helped is that the Ministry of Environment and Forests which gives the overall environment clearance isn’t known to be terribly efficient. As NC Jha told Times of India at the beginning of the year “Our 168 projects are pending environment and forest clearances at the Centre and State levels. Sixty-seven of these projects are greenfield and we are unable to make any investment in these. Remaining are ongoing expansion schemes, which too have been stalled.” Jha was the Chairman of Coal India at that point of time.
But these are small problems. The biggest problem facing Coal India is acquisition of land. The right to property is not a fundamental right in India. And over the years the government of India has acquired land forcibly from the citizens of this country at rock bottom prices. In the city of Ranchi, where this writer grew up, original landholders have still not been paid after their land was acquired to set up what was then one of the biggest public sector units in India.
Attempts to rehabilitate people whose land is acquired by the government, is rarely made. The homes built for this people are unlivable to say the least in a lot of cases. Hence, people resist to hand over their land, their only source of income.
Given this attitude of the government of India over the years the issue has become politicised. Hence, the state governments are not interested because by forcibly acquiring land they are likely to lose votes.
Due to these same reasons giving away coal blocks for free hasn’t worked and will not work. 193 out of the 195 coal blocks that government has given away for free are in the states of Jharkhand, West Bengal, Odisha, Madhya Pradesh, Chattisgarh and Maharashtra. All these states have a naxalite problem and that will effect the private and other government players as much as it has been impacting Coal India. The government’s environmental policy and the land acquisition policy continue to remain in a mess.
What also does not help is the fact that the expertise required to get a coal mine up and running is largely limited to Coal India. Mining coal isn’t exactly as easy as digging a tube-well.
In order to get a block up and running, companies need to prepare a mine plan, carry out the environmental impact study (EIS) of the area etc. The EIS essentially looks at what the current environment of the area is like, how mining coal will change that and what can be done to ensure that the current environment can be maintained. For Coal India this planning is done by Central Mine Planning and Design Institute (CMPDI), a 100% subsidiary. Such expertise is not easily available in the private sector.
To conclude
Coalgate is not a problem that emerged overnight. It is a problem created by the various Congress governments (given that the party has ruled the country for the most part since independence) over the years. This led to the Congress led UPA government giving away coal blocks for free to ensure that India produces more coal. But that is a problem that remains and will remain.
All data unless otherwise stated has been sourced from Provisonal Coal Statistics, 2011-2012, Coal Controller’s Organisation, Ministry of Coal.
(The article originally appeared on www.firstpost.com on September 11,2012. http://www.firstpost.com/business/why-giving-away-coal-blocks-for-free-was-never-a-solution-450915.html#disqus_thread)
(Vivek Kaul is a writer. He can be reached at [email protected])
Coal India
CAG was over-conservative in its Rs 1,86,000 cr loss number
Vivek Kaul
The Congress party seems to be hell bent on discrediting Vinod Rai, the Comptroller and Auditor General(CAG) of India, who has put the estimate of the losses on account of coal-gate at Rs 1.86 lakh crore.
The latest Congress politician to join the “pull Rai down” bandwagon is Digvijaya Singh.
Singh told The Indian Express that “the way the CAG is going, it is clear he(i.e. Vinod Rai) has political ambitions like TN Chaturvedi (a former CAG who later joined the BJP). He has been giving notional and fictional figures that have no relevance to facts. How has he computed these figures? He is talking through his hat.”
Let’s try and understand why what Singh said is nonsense of the highest order and anyone who has read the CAG report wouldn’t say anything that was as remarkably stupid as this. But before I do that let me just summarise the coalgate issue first.
Between 1993 and 2011, the government of India gave away 206 coal blocks for free to government and private sector companies. The idea being that Coal India Ltd wasn’t producing enough coal to meet the growing energy needs of the nation. So free coal blocks were given away so that other companies could produce coal to meet their own coal needs.
Of these blocks given away for free, 165 blocks were given away free between 2004 and 2011. The Congress led United Progressive Alliance(UPA) has been in power since May 2004. Hence, 80% of the coal blocks have been given away for free during the reign of the Congress led UPA government.
This explains to a large extent why the Congress leaders are trying to discredit the CAG. Before Digvijaya Singh, the Prime Minister Manmohan Singh broke his silence for once, and said that the CAG report could be questioned on a number of technical points. The finance minister P Chidambaram said there had been no losses because of free coal blocks allocations and then denied making the statement a little later.
The CAG report on the coalgate scam explains in great detail the method they have used to arrive at a loss figure of Rs 1.86 lakh crore. Hence Singh’s question “how has he computed these figures?” is sheer rhetoric and nothing else.
As is the case with any estimate the CAG made a number of assumptions (for those who have a problem with this, even the government’s annual budget is an estimate which is replaced by a revised estimate a year later, and the actual number two years later). The CAG started with the assumption that the coal mined out of the coal blocks has been given away for free. This coal could be sold at a certain price. Since the government gave away the blocks for free, it let go of that opportunity. And this loss to the nation, the CAG has tried to quantify in terms of rupees, in its report.
There were other assumptions that were made as well. Only the coal blocks given out to private companies were taken into account while calculating losses. Blocks given to government companies were ignored. Personally, I would have liked CAG to take the government companies into account as well while calculating the losses, because a loss is a loss at the end of the day. Also, transactions happen between various sections of the government all the time and the money earned on account of these transactions is taken into account. So should the losses. Out of the 165 blocks allocated since 2004, 83, or around half were allocated to government owned companies.
The amount of coal in a block is referred to as the geological reserve. The portion that can be mined is referred to as the extractable reserve. The CAG calculated extractable reserves of the private coal blocks to be around 6282.5million tonnes. This is the amount of coal that could have been sold.
The second part of the calculation was arriving at a price at which this coal could have been sold. For this the CAG looked at the prices at which Coal India, which produces 80% of India’s coal, sells its various grades of coal. Using these prices it arrived at an average price of Rs 1028.42 per tonne of coal. Obviously there is a cost involved in producing this coal as well. The average cost of production came to Rs 583.01 per tonne. Other than this a financing cost of Rs 150 per tonne was also taken into account.
This meant a profit of Rs 295.41 per tonne of coal (Rs 1028.42 – Rs 583.01 – Rs 150). Hence the government had lost Rs295.41 for every tonne of coal that it gave away for free. Hence, the losses were estimated to be at Rs 1,85,591.33 crore (Rs 295.41 x 6282.5 million tonnes).
This brings me back to Digvijaya Singh. “He has been giving notional and fictional figures that have no relevance to facts,” a part of his statement said. The numbers are not fictional at all. They are backed by hardcore data. If you don’t use the numbers of Coal India, a company which produces 80% of the coal in India, whose numbers do you use? That is a question that Singh should answer.
Also, the price at which Coal India sells coal to companies it has an agreement with, is the lowest in the market. It is not linked to the international price of coal. The price of coal that is auctioned by Coal India is much higher than its normal price. As the CAG points out in its report on the ultra mega power project, the average price of coal sold by Coal India through e-auction in 2010-2011 was Rs 1782 per tonne. The average price of imported coal in November 2009 was Rs 2874 per tonne (calculated by the CAG based on NTPC data). The CAG did not take into account these prices. It took into account the lowest price of Rs 1028.42 per tonne, which was the average Coal India price.
Let’s run some numbers to try and understand what kind of losses CAG could have come up with if it wanted to. At a price of Rs 1,782, the profit per tonne would have been Rs 1050 (Rs 1782-Rs 583.01- Rs 150). If this number had been used the losses would have amounted to Rs6.6lakh crore.
At a price of Rs 2874 per tonne, the profit per tonne would have been Rs 2142(Rs 2874 – Rs 583.01 – Rs 150). If this number had been used the losses would have been Rs 13.5lakh crore. This number is a little more than the Rs 13.18 lakh crore expenditure that the government of India incurred in 2011-2012.
Even a weighted average price of these three prices would have implied a loss of Rs 7.3lakh crore. And this when the coal blocks given to government companies haven’t been taken into account at all.
So the point is that the CAG like a good accountant has worked with very conservative estimates and come up with a loss of Rs1.86 lakh crore. It could have easily come up with substantially bigger numbers as I just showed.
Now coming to the final charge of Vinod Rai having political ambitions. “The way the CAG is going, it is clear he(i.e. Vinod Rai) has political ambitions like TN Chaturvedi (a former CAG who later joined the BJP),” said Singh. Well just because one former CAG joined politics does not mean that every other CAG will follow him.
Singh should well remember the old English adage: “one swallow does not a summer make”.
(The article originally appeared on www.firstpost.com on September 1,2012. http://www.firstpost.com/business/cag-was-over-conservative-in-its-rs-186000-cr-loss-number-439355.html)
(Vivek Kaul is a writer and can be reached at [email protected])