Tag: Coalgate | Vivek Kaul

20 March, 2015

Manmohan Singh—The dishonest politician

If Bollywood like Hollywood made political biopics, and if things hadn’t turned out the way they have, the story of the former Prime Minister Manmohan Singh would have made for a reasonably good movie.
Here was a man who rose through the ranks and got a doctorate in economics from the Oxford University. He became the Chief Economic Adviser in the seventies, governor of the Reserve Bank of India and the Deputy Chairman of the Planning Commission in the eighties, the finance minister of India in nineties and finally the Prime Minister of India in the noughties.
It was the classic story of an underdog who was sometimes “very lucky,” making it in life. This is a format that biopics thrive on. Nevertheless, in the autumn of his career, things aren’t going quite right for Singh. A happy ending is no longer on its way. His tenure as Prime Minister saw him overseeing probably the most corrupt and inefficient government that India has ever seen.
And now Singh, despite being not corrupt is paying for the same. A few days back, special CBI judge Bharat Parashar, summoned Singh as accused in what is now known as the Coalgate scam.
Parashar has summoned Singh for re-allocating a coal mine to Hindalco. As the judge said in his order: “There was a conscious effort on his part to somehow accommodate M/s Hindalco in Talabira-II coal block.” The screening committee had earlier allocated the block to the government owned Neyveli Lignite Corporation.
Singh could have easily saved himself from this embarrassment, if he had acted in a way he thought was the correct way to go about things. But before we get into that, a few other things need to be discussed.
On June 9, 1993, the the Coal Mines(Nationalisation) Act was amended to allow companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. This was done primarily because the government owned Coal India could not produce enough coal to meet demand.
Between 1993 and 2011, more than 200 hundred coal-blocks were given away free by various governments. Most of these blocks were allocated between 2004 and 2011 when the Congress led United Progressive Alliance was in power. A straight forward explanation for this lies in the fact that this was the period when coal prices had started to rally and hence, a free coal block had great value. Interestingly, Singh was coal minister for a significant period between 2004 and 2011.
The blocks were allocated by an inter-ministry screening committee which had the coal secretary as its Chairman. The committee was supposed to allot blocks after assessing applications by using parameters like techo-economic feasibility of the end-use project, the past record of the applicant in executing projects, the financial and technical capability and so on.
The trouble is that the process followed by the committee was not clear from its records. The former Comptroller and Auditor General Vinod Rai makes this point in his book Not Just An Accountant: “All that the records showed was that the committee met, deliberated and merely recorded the name of the block allotted to a company, and the state where the end-use plant existed. It is left to the reader to decide if transparency was a victim.”
Interestingly, from 2004 onwards the number of applicants for coal-blocks just went through the roof and it was not possible for the screening committee to be objective about the coal-block allocation. This is something that former coal secretary P C Parakh recounts in Crusader or Conspirator—Coalgate and Other Truths: “108 applications were received for Rampia and Dip Side of Rampia Block [names of two coal-blocks]. I found it difficult to make an objective selection when the number of applicants was in single digits. How could the Screening Committee take objective decisions when the number of applicants per block had run into three digits?”
In August 2004, Parakh proposed to Manmohan Singh(who had taken over as coal minister after Shibu Soren resigned) that the coal-blocks should be allocated through a process of competitive bidding. This would ensure transparency in allocation. It would keep also keep away non-serious players and help the government earn some revenue. On August 20, 2004, Singh approved allocation of coal-blocks through the competitive bidding route.
Immediately, letters written by various MPs opposing competitive bidding started to come in. As Parakh recounts in his book: “This included one from Mr Naveen Jindal who had considerable interest in coal mining.” What did not help was that Shibu Soren, who was a former coal minister by then, and would become coal minister again, opposed it. Dasari Narayana Rao, who was minister of state for coal, was also not in favour of the decision.
Politicians not wanting an auction was understandable because it would take away the influence that they had in allocating coal-blocks.
Singh gave into the pressure and on July 25, 2005, it was decided that the coal ministry would continue to allot coal-blocks through the screening committee route.
In a decision on September 24, 2014, the Supreme Court cancelled 204 out of the 218 coal-blocks allocated by the government since 1993. In fact in August 2014, the Court had stated that: “the entire exercise of allocation through Screening Committee route thus appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected.”
Singh could have saved himself a lot of embarrassment if he had insisted on the competitive bidding route, which he had agreed to in August 2004. But he looked the other way, choosing to give in to the compulsions of coalitions politics and the fact that if he did things his way, he would not last as the Prime Minister.
That’s the thing about being in power. Once you have it, it is better to look the other way than stand up for what you believe in and risk the chance of being fired and leading a retired life of loneliness. Singh may not have been personally corrupt, but he was dishonest to himself. He ultimately did not stand up for things that he believed in, in order to ensure that he continued to be the prime minister. And that is indeed very tragic.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Daily News and Analysis on Mar 20, 2015

30 September, 2014

Lessons from Coalgate: How to keep crony capitalists in check? Open up coal mining

Vivek Kaul

In the recent past several columnist and experts have been critical of the recent decision of the Supreme Court to cancel allocation of 204 out of 218 coal blocks that had been allocated free of cost by the government for captive mining.
As economist Abheek Barua writes in a column in the Business Standard “I have had a flurry of calls (anguished monologues in most cases) and noticed copious Facebook posts from fund manager friends from abroad expressing their concern over the Supreme Court’s cancellation of coal-block allocations.”
Similar arguments saying that foreign investors are worried have been made by several others. As Raghuram Rajan and Luigi Zingales write in a different context in Saving Capitalism from the Capitalists “No one will have the incentive to undertake long term investment—whether in acquiring specialized skills or in building physical capital—when there is no clarity about what the rules of the game are.”
This is the core point of the argument being made against the Supreme Court decision on the coalgate scam. If we keep changing the rules of the game, foreign investors are not going to come, we are being told by the experts.
The question that none of these experts are answering is what should the Supreme Court have done, if not this? In its judgement the Supreme Court has said that the process of allotment of free coal blocks for captive mining through the Screening Committee route suffers from the “vice of arbitrariness”. The Comptroller and Auditor General (CAG) in its audit of the Screening Committee meetings had come to a similar conclusion. (To read a detailed argument click here).
Given this, the Screening Committee route of allotment of coal blocks was non-transparent and opaque. There were other problems with it as well. Keeping this scenario in mind, the Supreme Court decided to cancel the allocation of coal blocks through this route.
And as far as foreign investors are concerned wouldn’t they want a process of allocation which is transparent, non opaque and based on objective criteria? Again the experts criticizing the Coalgate decision fail to answer this question.
Further, if the Screening Committee route of allocation of coal blocks was such a great method why did it not lead to a significant increase in the production of coal. Again no answers are offered by the experts on this question.
As per the 11th five year plan, which started in 2007-08, the production from the captive coal blocks was to expected to touch 111 million tonnes of coal per year by 2011-12. The captive coal blocks produced 36.2 million tonnes of coal during the course of that year. By 2016-17, the production of coal from these blocks was expected to touch 330 million tonnes. In 2013-2014, these blocks produced 39 million tonnes.
So why have these blocks not gotten anywhere around to producing the amount of coal they were expected to? Only 40 out of the 218 coal blocks allocated are currently producing coal. Given that they had got blocks for free, the companies seemed to be in no hurry to start production. That wouldn’t have been the case, had they paid for it in the first place.
Further, captive coal-mining has not succeeded anywhere in the world. As Partha Bhattacharya, former chairman of Coal India, writes in a column in The Indian Express “Captive end-users mining coal is not optimal. Nor is it known to have succeeded elsewhere in the world. Coal-mining has its own challenges and needs core competence, which the end-users are unlikely to possess.” In the Indian case the expertise required to get a coal mine up and running is largely limited to individuals working for Coal India. There is very little private expertise that is available and can be tapped.
The other big problem with captive mining is that coal blocks need to be artificially divided in order to be allocated to different companies. As Bhattacharya writes “In the process [of artificially dividing blocks, a huge quantity of coal is left out for creating barriers, which otherwise could have been mined out.”
This is something that former coal secretary PC Parakh also talks about in his book Crusader or Conspirator—Coalgate and Other Truths: “Talibara II and Talibara III are sub-blocks of a contagious coal block that has no geographical or geological features warranting its division into two separate mines. This division was unscientific and was done many years ago when coal blocks were identified for allocation to private companies for private use…Such division of coal blocks leads to loss of sizeable quantity of coal at the barriers.”
Given these reasons Bhattacharya feels that blocks should “be merged to create larger blocks, separated by natural boundaries instead of coal barriers.”
Further, it is important that the government allows commercial mining of coal by companies other than Coal India. Given that expertise in India to set up and run a coal mine is limited it is important that we allow international companies to enter this sector. This will call for the amendment of the Coal Mines (Nationalization) Act of 1973.
Obviously this decision is likely to be opposed by political parties and trade unions. But it is worth remembering that Coal India now produces a major part of its coal through outsourced contracts. In fact, this is the major reason why the company has Rs 52,000 crore of cash on its books. And in that sense the sector has already been privatised. (For a detailed argument click here).
The first thing opening up of the sector will do is to create some competition for Coal India. The captive block route of coal production does not do that at all. The companies have to pass on the excess coal that they produce and which does not get used up in the production of power, steel, cement, aluminium etc., to the local subsidiary of Coal India.
Between financial year 2009-2010 and 2013-2014, the total amount of coal produced by Coal India went up at the minuscule rate of 1.7% per year from 431.3 million tonnes to 462.4 million tonnes.
Some competition is likely to improve the productivity of Coal India. As Swaminathan Aiyar writes in The Economic Times “In Australia, collieries produce 75 million tones per manshift (of eight hours) in open-cast mines and 40 tonnes per manshift in underground mines. Coal India averages barely 7 tonnes and 0.8 tonnes respectively…Coal India’s machines work 15 hours per day , against 22 hours per day in efficient mines.”
This is the major reason why the supply of coal in India has far outstripped its demand. If Coal India has to increase its productivity, some competition will do it no harm. As Bhattacharya puts it “Besides turning the current situation of acute coal shortage into one of abundance, competitive pressures are expected to bring prices well below the imported coal price, since the wage cost is likely to remain far lower in India than elsewhere, whereas productivity is expected to converge to international levels.”
In fact, if we had opened up commercial mining of coal in the 1990s, we wouldn’t have been suffering from the current shortage. As Parakh writes “Had we opened up coal mining to private sector for commercial mining, along with power sector, in the early 1990s, we would by now have at least half a dozen large coal mining companies in the private sector. This is what happened in the telecom sector. The country would not be facing huge shortage of coal and large outgo of foreign exchange on import of coal.”
To conclude, it is important that the sector be opened up for foreign companies as well, to keep India’s crony capitalists under check. As Rajan and Zingales put it “The most effective way to reduce the power of incumbents to affect legislation is to keep domestic markets open to international competition…Openness creates competitions from outsiders—outsiders that incumbents cannot control through political means.”
The article originally appeared on www.FirstBiz.com on Sep 30, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

27 September, 2014

Lessons from Coalgate and Naveen Jindal: It is important to save capitalism from capitalists

Vivek Kaul

In an interview to NDTV, Naveen Jindal , chairman of Jindal Steel and Power, and Congress politician said that his company would not be able to pay the fine imposed by the Supreme Court. “We will not be able to pay it..because we have not made a provision for it,” Jindal said.
Jindal also told the television channel that the Supreme Court decision “was a ‘setback’ for companies which have mined coal for the past 20 years to generate power and make steel, and now been told that what they are doing is illegal, while they have been creating wealth for the country.”
In a decision on September 24, 2014, the Supreme Court had cancelled 204 out of the 218 coal blocks allocated by the government since 1993. The coal blocks were allocated for free for captive mining. Companies which were given these blocks could use the coal to produce power, iron and steel, aluminium, cement etc. The Court has also fined companies at the rate of Rs 295 per tonne for all the coal that they have produced till date and will continue producing till March 31, 2015, when they need to hand over their mines to the government.
Jindal was the biggest beneficiary of the captive coal block allotments, having been given nine blocks in all. Given this, things he has said in the NDTV interview need to be looked at closely.
The first thing Jindal talks about are “companies which have mined coal for twenty years.”
No company has been mining coal for twenty years. Provisional coal statistics released by the Coal Controller Organisation, which is a part of the coal ministry, shows that coal was first mined by the captive coal blocks only in 1997-98. Also, during this year a minuscule amount of 0.71 million tonnes of coal was produced by these mines. The production crossed 10 million tonnes of coal only in 2004-2005, when these blocks produced 10.11 million tonnes. Hence, serious production from these coal mines has happened only for 10 years and not 20 years as Jindal points out. This was primarily because between 1993 and 2002 only 15 blocks had been allocated to private companies.
This maybe nitpicking, nonetheless it is an important factual point to make given the sensitivity of the issue. In Jindal Steel and Power’s case the Gare Palma IV coal block has been operational from February 1999. This coal mine produced 6 million tonnes of coal in 2013-2014 and is expected to produce a similar amount in 2014-2015.
Further, just because something has been happening for many years, doesn’t mean it is right, even though it may have been government policy. The coal blocks were allocated based on the recommendations of an inter ministerial screening committee. The committee was set up in July 1992 and the coal secretary was its chairman.
As Vinod Rai writes in Not Just an Accountant—The Diary of the Nation’s Conscience Keeper “This committee was to scrutinize applications for captive mining and allocate coal blocks for development, subject to statutes governing coal mining, following which the coal minister would approve the allotment…The screening committee is expected to asses applications based on parameters such as the techno-economic feasibility of the end-use project, status of preparedness to set up the end-use project, past track record in executing projects, financial and technical capabilities of applicant companies and the recommendations of the concerned state governments and ministries.”
The committee was supposed to look at each application based on these criteria and then make a decision of who to allot the coal block to. But that doesn’t seem to have happened. As the Supreme Court judgement dated August 25, 2014, clearly points out “The entire exercise of allocation through Screening Committee route thus appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected.”
The judgement further points out that “there is no evaluation of merit and no inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective as the minutes of the Screening Committee meetings do not show that selection was made after proper assessment. The project preparedness, track record etc., of the applicant company were not objectively kept in view.”
Further, the guidelines that the Screening Committee was supposed to follow did not contain “any objective criterion for determining the merits of the applicants.” “As a matter of fact, no consistent or uniform norms were applied by the Screening Committee to ensure that there was no unfair distribution of coal in the hands of the applicants.” The Supreme Court came to this conclusion after studying the minutes of the Screening Committee meetings.
Interestingly, the Comptroller and Auditor General(CAG) had come to a similar conclusion when it had audited the procedure for allotment of coal locks in mid 2011. As Rai points out “The process that the committee actually followed was not really clear from the records. All that the records showed was that the committee met, deliberated and merely recorded the name of the block allotted to a company, and the state where the end-use plant existed. It is left to the reader to decide if transparency was a victim and, if so, how audit erred in pointing out this lacuna.”
The problem was that even if the Screening Committee wanted to follow objective criteria, at times it was simply not possible. Former coal secretary P C Parakh (who took over as coal secretary in the second week of March 2004) explains this in Crusader or Conspirator—Coalgate and Other Truths “By the time I took charge of the ministry, the number of applicants for each block had increased considerably although still in single digits. I found a number of applicants fulfilling the criteria specified for allocation of each block on offer. This made objective selection extremely difficult.”
In fact in the years to come the situation became much worse as more and more companies applied for coal blocks. As Parakh writes “According to CAG’s report, 108 applications were received for Rampia and Dip Side of Rampia Block [names of two coal blocks]. I found it difficult to make an objective selection when the number of applicants was in single digits. How could the Screening Committee take objective decisions when the number of applicants per block had run into three digits?”
Parakh to his credit realized pretty early that the Screening Committee method of allotment wasn’t working. In fact, in his book Parakh goes on to list several reasons on why giving away coal blocks free for captive mining by companies just did not make sense. By giving away coal blocks for free, companies which had no experience in coal mining were getting into a totally unrelated field. The government had no way of monitoring whether the captive mine was being used for captive use. Or was the company, which had got the coal block, selling the coal it was producing in the open market and thus “promoting corruption and black money”. Further, the system of allocation of coal blocks for free was discriminatory. It offered a huge premium to companies which managed to get a free coal block, in comparison to ones that did not.
Hence, Parakh proposed to Manmohan Singh(who had taken over as coal minister) in August 2004 that coal blocks should be allotted through the competitive bidding route. Before he did this Parakh had even called an open discussion of all the stakeholders in June 2004.
The stakeholders included the business lobbies FICCI, CII and Assocham, other ministries whose companies had applied for coal blocks and private companies.
Parakh points out that most invitees were not in favour of competitive bidding of coal blocks. As he puts it “not many participants were enthusiastic about open bidding. Their main argument was that the cost of coal to be mined would go up if coal blocks were auctioned.”
Parakh suggests that assuming that business men bidding for coal blocks (if such a process were to be introduced) would drive up the price of coal to astronomical levels is suggesting that they are stupid. As he writes “Participants at open auctions are hard-headed businessmen with an acute sense of profitability. They do not make irrationally high bids. The price at which coal from CIL[Coal India Ltd] was available would automatically put a cap on the bid amount.”
The industry ultimately resisted open bidding simply because until then they had been getting coal blocks for free. And if something is available for free why pay for it. “To an extent, it was a reflection of corporate India’s aversion to transparency,” writes Parakh.
Nevertheless on August 20, 2004, Manmohan Singh approved allocation of coal blocks through the competitive bidding route. Immediately after this a number of letters written by MPs opposing competitive bidding started coming in. As Parakh writes “This included one from Mr Naveen Jindal who had considerable interest in coal mining.”
This is when Dasari Narayana Rao, the famous Telgu film director, who was the minister of state for coal. entered the scene. As Rai points out in his book “Rao, observed that any change in the procedure for the allocation of coal blocks would invite further delay in allocation.”
As Rao wrote while submitting the file to Manmohan Singh: “It is difficult to agree with the view that Screening Committee cannot ensure transparent decision-making. This alone was not adequate ground for switching over to a new mechanism, particularly when the interests of core infrastructure areas are involved.”
On March 25, 2005, Manmohan Singh “recorded the approval of the cabinet note seeking sanction of the competitive bidding system,” Rai points out. But Rao still did not give up and kept talking about the “cost implications” of the competitive bidding system of allocation of coal blocks. He finally succeeded and on July 25, 2005, it was decided that the coal ministry would continue to allot coal to blocks through the Screening Committee route.
In May 2014 the enforcement directorate slapped money laundering charges against Rao and Jindal. As the PTI reported “The agency, according to sources, has framed the charges after it found multi-layered transactions between the firms owned by Jindal to Rao’s firms based in Hyderabad and “illegal money” was routed for alleged favours given for the allocation of coal firms to Jindal.”
Interestingly Jindal told NDTV that “one of the Jindal companies had lent money to an unrelated company, which in turn invested in a company in which the Mr Rao had a controlling stake.”
Given this, the situation is not as simplistic as Jindal tried to project in his NDTV interview. Also, between the Supreme Court and the CAG it has been clearly established that the Screening Committee route to allot coal blocks was not transparent at all and companies which got coal blocks benefited from this lack of transparency. Given this, it led to the Supreme Court cancelling 204 out of the 218 blocks that had been allocated, including coal mines which were already under operation.
Jindal in his interview also told NDTV that his company won’t be able to pay the fine imposed by the Supreme Court because they hadn’t made a provision for it. The Supreme Court has fined the companies already operating coal blocks Rs 295 per tonne for all the coal that they have produced till now and all the coal they will continue to produce till March 31, 2015, when they need to hand over the mines back to the government. This in a way took care of what Parakh termed as discriminatory. As he writes “The [Screening Committee] system of allocation of captive [coal] blocks offers huge advantage to industries that get coal blocks over those who are not able to get coal blocks.”
Edelweiss Securities estimates that Jindal Steel and Power will have to pay a fine of close to Rs 3000 crore. While the company may not have made a provision to pay the fine, it needs to be pointed out that as on March 31, 2014, the company had a balance sheet size of Rs 74,072.1 crore. Its reserves and surplus amounted to Rs 22,519 crore. It had cash and bank balances of Rs 1,015.28 crore. Further, in the last two financial years it has made a total profit of Rs 4820.5 crore.
Also, let’s calculate the financial benefit arising out of the Gare Palma IV coal block which as pointed out earlier has been operational from February 1999. This coal mine produced 6 million tonnes of coal in 2013-2014 and is expected to produce a similar amount in 2014-2015.
A research report brought out by Kotak Institutional Equities suggests that it costs Rs 600-800 per tonne to produce captive coal. In comparison, it costs Rs 3,500 per tonne to import coal. Hence, imported coal is four to five times more expensive than captive coal.
So the cost of producing 12 million tonnes of coal over a two year period at the upper end cost of Rs 800 per tonne would have been Rs 960 crore. Along with a fine of Rs 295 per tonne this amounts to Rs 1314 crore. Consider the other possibility of importing coal at Rs 3500 per tonne. This would have cost the company Rs 4200 crore. The difference between these two numbers comes to Rs 2886 crore. This calculation just takes the last two years into account. Nevertheless the mine has been functioning for close to 15 years now.
The total fine that the company needs to pay amounts to around Rs 3000 crore. Hence, even after it pays the fine the company would have managed to save a lot of money over the years because it got the coal block for free through a process which wasn’t transparent at all.
In fact, Jindal isn’t the only one protesting. The pink papers over the last few days have been full of quotes criticizing the Supreme Court’s decision to cancel the coal block allocations. But when a process has not been transparent for 20 years, it needs to be cancelled. And when this happens, there are bound to be repercussions, which the incumbents won’t like.
As the American author Upton Sinclair once wrote “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” The corporates and their lobbies who are coming out against the Supreme Court’s decision are a good example of this.
It needs to be pointed out here that only 40 out of 218 coal blocks are currently operational. Companies, given that they had got blocks for free, seemed to be in no hurry to start production. That wouldn’t have been the case, had they paid for it in the first place.
To conclude, it is worth quoting what Raghuram Rajan and Luigi Zingales write in Saving Capitalism from the Capitalists “Since a person may be powerful because of his past accomplishments or inheritance rather than his current abilities, the powerful have a reason to fear markets…Those in power – the incumbents – prefer to stay in power.” Jindal clearly would have liked that.
The article originally appeared on www.FirstBiz.com on Sep 28, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

26 September, 2014

Side effects of SC’s coal block verdict: 6 issues the govt will have to solve quickly

Vivek Kaul

In a landmark decision yesterday, the Supreme Court cancelled majority of the 218 coal blocks that were handed out free by the various governments since 1993 for captive mining.
The Coal Mines (Nationalisation) Act 1973 was amended in June 1993, allowing companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. Hence, the coal that these companies produced in these mines was to be used to feed into the production of power, iron and steel etc.
This amendment was used to allot coal blocks for free to private and public sector companies to the condition that the coal produced was used for captive mining. The Supreme Court judged the process of allocation of these coal block to be suffering “from the vice of arbitrariness”. Hence, it cancelled a majority of the allocations.
But these cancellations will have several repercussions in the days and months to come. I discuss these repercussions here:

1) Currently 40 out of the 218 coal blocks that were allocated produce coal. The Supreme Court has cancelled all these allocations except one mine belonging to SAIL and two mines which feed coal into Sasan Power, which is an ultra mega power project. Data from the ministry of coal suggests that these mines are likely to produce around 52.9 million tonnes of coal during this financial year (April 1, 2014 to March 31, 2015).
Of this, the mines that have not been cancelled are likely to produce around 2.07 million tonnes of coal. This means that the cancelled coal mines will produce around 50.83 million tonnes of coal during the course of this financial year. The Supreme Court in its judgement yesterday said “we make it clear that the cancellation will take effect only after six months from today, which is with effect from 31^st March, 2015.”
So what happens from April 1, 2015? As yesterday’s judgement points out “The Central Government is confident, as submitted by the learned Attorney General, that the CIL[Coal India Ltd can fill the void and take things forward.” Hence, Coal India is likely to operate these mines after the cancellation comes into effect.
This as I had explained in a previous piece has its own set of challenges. Coal India is a for profit enterprise and hence, it needs to be figured out who will bear the cost of operation during the period Coal India runs these mines. Further, will it be allowed to keep the profits it makes during the period it operates the mines?
Also, the government will have to figure out how to transfer these mines. As Ashok Khuarana, director of the Association of Independent Power Producers told The Economic Times “It is not yet clear how the operational mines would be transferred…If Coal India is taking over the mines, they ought to take over the liabilities too otherwise it would jeopardise the lenders.”
As mentioned earlier these mines are captive mines which supply to other units primarily producing coal and power. Hence, during the period Coal India takes over these mines it will have to make arrangements for transporting coal from the mine to the unit where it will be used. These arrangements need to be figured out.
Further, Coal India will have to transfer its own employees to run these mines. Again, a lot of manpower in coal-mines is statutory and cannot be just transferred overnight, until a replacement is found. Given this, it is important that the Coal Ministry and Coal India work in tandem over the next six months to have an actionable plan in place to take over the mines and continue producing coal.
2) It is very important that production in these coal mines is not stopped at any point of time. As pointed out earlier these mines are expected to produce around 50.83 million tonnes during the course of this financial year. This is around 8.6% of the total coal expected to be produced in India during this financial year. It is not an insignificant number by any stretch of imagination.
If Coal India doesn’t get around to producing coal in these mines starting from April 1, 2015, the power, iron and steel, cement and aluminium plants that these coal mines feed into, will have to import coal. There are several problems in importing coal. First and foremost imported coal is costlier. A research report brought out by Kotak Institutional Equities suggests that it costs Rs 600-800 per tonne to produce captive coal. In comparison, the e-auction price of coal sold by Coal India is Rs 2,200 per tonne. And it costs Rs 3,500 per tonne to import coal. Hence, imported coal is four to five times more expensive than captive coal.
Also, it is most likely that companies which have operational coal mines which feed into their power and iron and steel plants, will have to import coal. They may not be able to buy it from Coal India because Coal India already has prior commitments in place and may not be able to fulfil their coal needs.
As Crisil Research points out in a report titled De-allocation of operating coal mines to severely impact metal players “Players who have operational coal blocks will witness a sharp decline in profitability post 2014-15, as they would have to substitute captive coal with imported coal which is about four times more expensive (as Coal India may not supply domestic coal to these players given its FSA[Fuel Supply Agreement] commitments to the power sector).”
Further, these companies will also have to pay a fine of Rs 295 per tonne for all the coal that they have produced till date and will continue to produce until March 31, 2015. As I had explained in a piece yesterday, the cost of this fine will come to a little over Rs 10,000 crore.
3) Also, importing coal in a huge quantity will not be easy. Our ports will have a tough time handling this additional quantity of coal that will have to be imported. Over and above that, the Indian Railways is not exactly geared to be able to transport this “extra” coal from the ports to different parts of the country where it is required. The added infrastructure that will be required to handle the additional imports cannot be created overnight. Further, sourcing more than 50 million tonnes of coal from the international market will not be easy, and will push up the international price of coal. India imported nearly 171 million tonnes of coal in 2013-2014 (April 1, 2013 to March 31, 2014). This went up by around 18% in comparison to 2012-2013 (April 1, 2012 to March 31,2013).
4) Imported coal will also mean that the cost of production of power will go up for companies which had been using captive coal supply. Hence, it is important that Coal India takes over these mines smoothly and continues producing coal. A recent report in the Business Standard points out that the coal being produced in the mines already in operation was being used to produce “26,000 Mw of power output and 12 million tonnes of steel.”
5) Banks will also come under pressure because of the allocation of coal blocks being cancelled. A straight forward reason is that companies have spent money in getting these mines up and running. Now with the mines being taken away it is bound to put pressure on banks, as companies may not be able to continue servicing these loans. A report published by Enam Securities estimates that in total,n banks have loaned out about Rs 37,000 crore to the mining sector. Coal mines form around half of this lending. This amounts to around 0.6% of the total loans given by banks. Prima facie this does not sound like a big number but things could turn out to be much worse. “While this figure on [coal] mines seems low, the impact could be much greater, as it will impact power plants dependent on these mines,” Enam Securities pointed out.
A report in the Business Standard points out that “According to brokerage firm Anand Rathi Financial Services, the Supreme Court order will hit Andhra Bank the hardest, as the power sector accounts for 13.4 per cent of its total industry loan book.” This is followed by UCO Bank which has an exposure of 13.1 per cent of its total industry loan bank.
6) The government is likely to auction the coal blocks after it takes them over starting April 1, 2015. Interestingly, analysts are expecting that companies which have lost coal mines will bid aggressively in this auctions. As Crisil Research points out “We expect players whose blocks are de-allocated to bid aggressively to retain their blocks, given the operational advantages such as proximity to end-use plants, quality of coal and consequent equipment configuration. Moreover, competition from other players operating in the vicinity of these blocks will also be very high as these are operational mines and the cost of imported coal is also higher.”
This will mean a windfall for the government if the auctions are designed well.
To conclude, there will be a lot of repercussions from yesterday’s decision on coalgate by the Supreme Court. The government will have to move fast in order to limit damage.
The article appeared originally on www.Firstbiz.com on Sep 26, 2014.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

16 September, 2014

Vinod Rai has had the last laugh on Coalgate. Here’s why

Vivek Kaul

In an interview with the Business Standard in September 2013, Jairam Ramesh was asked why the Congress party was losing ground so badly in urban India. “Because of the bhumihar from Ghazipur,” Ramesh replied. He was referring to the former Comptroller and Auditor General (CAG) of India, Vinod Rai, who had retired from his post in May 2013. The CAG in a series of reports had exposed the wrongdoings of the government.
As Rai writes in Not Just an Accountant—The Diary of the Nation’s Conscience Keeper “Jairam Ramesh was a regular visitor to the CAG headquarters for discussions on the audit of the national rural employment guarantee programme. His discussions did indeed lend value. In one of the conversations with me, he asked why N.K.Singh, the Rajya Sabha MP representing the Janata Dal(United), used to refer to me not only as a bhumihar but as a ‘bhumihar from Ghazipur’. I told him I did know what it meant.” Rai further writes that even his caste was brought into prominence, “and this after sixty-seven years of independence.”
Ramesh’s quip against Rai was a part of a series of statements made by leaders of the Congress party to discredit him. This after, the CAG had meticulously gone about exposing wrongdoings of the government in the telecom, coal, sports and aviation sectors.
Manish Tewari, the Congress leader who can speak on just about anything, said that the “R-virus has infected the Indian growth story. The R-virus stands for a phenomenon were responsible individuals decide to become loose cannons.” On another occasion Tewari said “When individuals decide to go rogue, institutions suffer. That possibly has the most detrimental effect on the India growth story.” Sharad Pawar, who is a part of the UPA, and was the food and agriculture minister in the UPA government said “CAG has taken certain decisions that have created a different atmosphere in the country… I haven’t seen anything like this in the forty-five years of my career as a politician.” Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, went on to claim that “untrained staff [is] auditing CAG reports.” The business lobby ASSOCHAM even went to the extent of releasing advertisements which said that CAG reports were sending wrong messages. The advertisement went on to state “The CAG’s conclusions over the 57 coal block allotment appear to have been arrived at without taking all facts into consideration. Only one of the 57 blocks has gone into production.”
The then finance minister P Chidambaram even went to the extent of saying that the government had faced no loss from giving away coal blocks free to private and public sector companies. “If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued,”Chidambaram had said.
In order to understand this statement we need to go back to the early 1990s. The government at that point of time realized that enough coal was not being produced. The Coal Mines(Nationalisation) Act was amended with effect from June 9, 1993. This was done largely on account of the inability of Coal India Ltd (CIL), which produces most of India’s coal, to produce enough coal.
The coal production in 1993-94 was 246.04 million tonnes, up by 3.3% from the previous year. This rate was not going to increase any time soon as newer projects had been hit by delays and cost over-runs, as still often happens in India. As the Economic Survey of 1994-95 pointed out “As on December 31, 1994, out of 71 projects under implementation in the coal sector, 22 projects are bedevilled by time and cost over-runs. On an average, the time over-run per project is about 38 months. There is urgent need to improve project implementation in the coal sector.”
The idea, as the Economic Survey of 1994-1995 pointed out, was 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 amendment to the Coal Mines (Nationalisation) Act 1973 allowed companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. Hence, the coal that these companies produced in these mines was to be used to feed into the production of power and iron and steel. Any excess coal was to be handed over to the local subsidiary of the Coal India Ltd.
Between 1993 and 2011, 195 coal blocks were given away for free to public and private sector companies for captive use. Most of these free coal blocks were given away between 2004 and 2011. Nevertheless even by 2011-2012, these coal blocks produced only 36.9 million tonnes of coal. This amounted to around 6.8% of the total production of 539.94 million tonnes during the course of that year.
And because very little coal was being produced in these captive mines, this led Chidambaram and the industry lobby Assocham to put forward the argument that since coal was not being mined how did the government face any losses? This was a really stupid argument to make. The government handed over a natural asset free to private and public sector players. They, in turn, were not able to mine coal from it quickly enough. How does that mean that the government did not face any losses? It does not change the fact that coal blocks were essentially handed over for free.
As Rai puts it in his book: “I thought any prudent and concerned industry body would have questioned the urgency to allot when the allottees had not even commenced mining. But then, since every person who wanted to display his loyalty to the government was hastening to take potshots at the CAG, why not an industry body?”
Interestingly, Manmohan Singh explained the inability of the private coal producers to start producing coal quickly enough by saying “it is true that the private parties that were allocated captive coal blocks could not achieve their production targets. This could be partly due to the cumbersome processes involved in getting statutory clearances.”
This Rai says is a defeatist argument. As he writes “This does appear to be a defeatist argument; if the government is aware that the processes are cumbersome and accords the process urgency, it is incumbent on the government to take steps to ensure speedy clearances.”
The CAG came in for heavy criticism for coming up with a loss figure of Rs 1,86,000 crore for these coal blocks being given away free by the government. In his book, Rai explains with great clarity how this number was arrived at. The CAG worked with most conservative estimates while coming up with this number. While calculating the loss the CAG did not take into account the coal blocks given to the public sector companies. Only blocks given to private sector companies were taken into account.
The total geological reserves of the coal blocks given away for free amounted to around 44.8 billion tonnes. The total amount of coal in a block is referred to as geological reserve. But not all of it can be extracted. Open cast mining of coal typically goes to a depth of around 250 metres below the ground whereas underground mining goes to a depth of around 600-700 metres. Beyond this, it is difficult to extract coal.
The portion of the geological reserves that can be extracted are referred to as extractable reserves. The CAG worked with fairly conservative estimates on this front as well. Typically extractable reserves are around 80-95% of geological reserves. As Rai writes “Audit based its computation on [the] conservative estimate of 73 million tonnes for every 100 million tonnes given in the GR [geological reserve]…Can audit be faulted if its computation was based on a conservative estimate of 73 per cent?…The extractable reserves…based on the aforementioned method, was found by the CAG to be 6282.5 million tonnes, which is mentioned in the report.”
So only 6282.5 million tonnes of the 44.8 billion tonnes of geological reserves was assumed as extractable reserves while calculating the losses of the government due to giving away coal blocks for free.
After establishing the extractable reserves the CAG needed to establish the price at which this coal could be sold as well as the cost of production of this coal. For establishing the price at which the coal cold be cold, the CAG considered three possible options.
“The first was by imports. The average import price of non-coking coal sourced from Indonesia during 2010-2011 was Rs 3,678 per tonne (Indonesia supplied most of our non-coking coal imports). The second source was the coal sold in e-auction by Northern Coalfields Limited, a subsidiary of CIL [Coal India Ltd] based in Singrauli. The third and major source of coal supply in the country was that which was mined and supplied by CIL. Audit utilized the only creditable data available in the public domain—that of CIL. CIL is regularly audited by the CAG, so its accounts and other details can be taken as authentic. From the audited accounts of 2010-2011, the average sales price of all grades of coal sold by CIL was taken as Rs 1,028 per tonne. This was the most conservative price too,” writes Rai.
After this, the cost of production of coal needed to be established. For this, the CAG again went back to CIL, which produces most of the coal in the country. As Rai writes “The average cost of coal mined by CIL was found to be Rs 583 per tonne. The MoC has indicated, after due verification, that the financing cost ranged from Rs 100 to Rs 150 per tonne. To be on the safe and conservative side, audit assumed it to be at Rs 150. Thus, while the average sale price was Rs 1,028, the average cost was Rs 583 plus Rs 150, namely Rs 733,” writes Rai.
Manmohan Singh later criticized this calculation by saying “the cost of production of coal varies significantly from mine to mine even for CIL due to varying geo-mining conditions, method of extraction, surface features, number of settlements, availability of infrastructure etc.”
By taking the average cost of production these are exactly the factors that CAG was taking into account. And this left Rs 295 per tonne (Rs 1028 minus Rs 733) as the financial benefit. So Rs 295 of financial benefit per tonne was multiplied with 6282.5 million tonnes of extractable reserves and a loss figure of close to Rs 1,86,000 crore was arrived at.
As you can clearly see the most conservative estimates had been used to arrive at a loss number. If the CAG had not used these conservative estimates it could have easily put out a much bigger number for these losses.
Another criticism that the CAG came in for was that the loss calculation did not take the concept of net present value(NPV) into account. “Even if discounting had been done to arrive at the NPV, we would have possibly projected an annual increase of 10 per cent in cost/sale price, and we would then have discounted, at, say, a discount factor of 10 per cent. We would have got to an NPV of financial gain of Rs 2.40 lakh crore, at 11 per cent of Rs 1.86 lakh crore and at 12 per cent of Rs 1.49 lakh crore. There is no substantial difference. Hence, why all the ire?”
In the end, Vinod Rai has had the last laugh. The Supreme Court in a recent decision deemed the allocation of coal blocks to be illegal. And for those who are still not convinced about the way Rai operated as the CAG, it is time they read his book.
The article appeared on www.FirstBiz.com on Sep 16, 2014

(Vivek Kaul is the author of Easy Money. He tweets @kaul_vivek)