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. http://www.deccanchronicle.com/editorial/dc-comment/canaries-coal-951)
(Vivek Kaul is a Mumbai based writer. He can be reached at [email protected])
Comptroller and Auditor General of 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])
Why Manmohan Singh was better off being silent
Vivek Kaul
So the Prime Minister (PM) Manmohan Singh has finally spoken. But there are multiple reasons why his defence of the free allocation of coal blocks to the private sector and public sector companies is rather weak.
“The policy of allocation of coal blocks to private parties…was not a new policy introduced by the UPA (United Progressive Alliance). The policy has existed since 1993,” the PM said in a statement to the Parliament yesterday.
But what the statement does not tell us is that of the 192 coal blocks allocated between 1993 and 2009, only 39 blocks were allocated to private and public sector companies between 1993 and 2003.
The remaining 153 blocks or around 80% of the blocks were allocated between 2004 and 2009. Manmohan Singh has been PM since May 22, 2004. What makes things even more interesting is the fact that 128 coal blocks were given away between 2006 and 2009. Manmohan Singh was the coal minister for most of this period.
Hence, the defence of Manmohan Singh that they were following only past policy falls flat. Given this, giving away coal blocks for free is clearly UPA policy. Also, we need to remember that even in 1993, when the policy was first initiated a Congress party led government was in power.
The PM further says that “According to the assumptions and computations made by the CAG, there is a financial gain of about Rs. 1.86 lakh crore to private parties. The observations of the CAG are clearly disputable.”
What is interesting is that in its draft report which was leaked earlier in March this year, the Comptroler and Auditor General(CAG) of India had put the losses due to the free giveaway of coal blocks at Rs 10,67,000 crore, which was equal to around 81% of the expenditure of the government of India in 2011-2012.
Since then the number has been revised to a much lower Rs 1,86,000 crore. The CAG has arrived at this number using certain assumptions.
The CAG did not consider the coal blocks given to public sector companies while calculating losses. The transaction of handing over a coal block was between two arms of the government. The ministry of coal and a government owned public sector company (like NTPC). In the past when such transactions have happened revenue from such transactions have been recognized.
A very good example is when the government forces the Life Insurance Corporation (LIC) of India to forcefully buy shares of public sector companies to meet its disinvestment target. One arm of the government (LIC) is buying shares of another arm of the government (for eg: ONGC). And the money received by the government is recognized as revenue in the annual financial statement.
So when revenues from such transactions are recognized so should losses. Hence, the entire idea of the CAG not taking losses on account of coal blocks given to pubic sector companies does not make sense. If they had recognized these losses as well, losses would have been greater than Rs 1.86lakh crore. So this is one assumption that works in favour of the government. The losses on account of underground mines were also not taken into account.
The coal that is available in a block is referred to as geological reserve. But the entire coal cannot be mined due to various reasons including those of safety. The part that can be mined is referred to as extractable reserve. The extractable reserves of these blocks (after ignoring the public sector companies and the underground mines) came to around 6282.5 million tonnes. The average benefit per tonne 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 is a very conservative method CAG arrived at the loss figure of Rs 1,85,591.33 crore (Rs 295.41 x 6282.5million tonnes).
Manmohan Singh in his statement has contested this. In his statement the PM said “Firstly, computation of extractable reserves based on averages would not be correct. Secondly, 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.”
As the conditions vary the profit per tonne of coal varies. To take this into account the CAG has calculated the average benefit per tonne and that takes into account the different conditions that the PM is referring to. So his two statements in a way contradict each other. Averages will have been to be taken into consideration to account for varying conditions. And that’s what the CAG has done.
The PM’s statement further says “Thirdly, CIL has been generally mining coal in areas with
better infrastructure and more favourable mining conditions, whereas the coal blocks offered for captive mining are generally located in areas with more difficult geological conditions.”
Let’s try and understand why this statement also does not make much sense. As The Economic Times recently reported, in November 2008, the Madhya Pradesh State Mining Corporation (MPSMC) auctioned six mines. In this auction the winning bids ranged from a royalty of Rs 700-2100 per tonne.
In comparison the CAG has estimated a profit of only Rs 295.41 per tonne from the coal blocks it has considered to calculate the loss figure. Also the mines auctioned in Madhya Pradesh were underground mines and the extraction cost in these mines is greater than open cast mines. The profit of Rs 295.41was arrived at by the CAG by considering only open cast mines were costs of extraction are lower than that of underground mines.
The fourth point that the PM’s statement makes is that “Fourthly, a part of the gains would in any case get appropriated by the government through taxation and under the MMDR Bill, presently being considered by the parliament, 26% of the profits earned on coal mining operations would have to be made available for local area development.”
Fair point. But this will happen only as and when the bill is passed. And CAG needs to work with the laws and regulations currently in place.
A major reason put forward by Manmohan Singh for not putting in place an auction process is that “major coal and lignite bearing states like West Bengal, Chhattisgarh, Jharkhand, Orissa and Rajasthan that were ruled by opposition parties, were strongly opposed to a switch over to the process of competitive bidding as they felt that it would increase the cost of coal, adversely impact value addition and development of industries in their areas.”
That still doesn’t explain why the coal blocks should have been given away for free. The only thing that it does explain is that maybe the opposition parties also played a small part in the coal-gate scam.
To conclude Manmohan Singh might have been better off staying quiet. His statement has raised more questions than provided answers. As he said yesterday “Hazaaron jawabon se acchi hai meri khamoshi, na jaane kitne sawaalon ka aabru rakhe”.For once he should have practiced what he preached.
(The article originally appeared in the Daily News and Analysis on August 29,2012. http://www.dnaindia.com/analysis/column_why-manmohan-singh-was-better-off-being-silent_1734007))
(Vivek Kaul is a writer and can be reached at [email protected])
Chimpanzee Ai knows what zero means, but does Chidambaram?
Vivek Kaul
Tetsuor Matsuzawa is the director of the Primate Research Institute at Kyoto University in Japan. Among other things, Matsuzawa has taught a chimpanzee named ‘Ai’ to recognize the number zero.
As Alex Bellos writes in Alex’s Adventures in Numberland, “Ai had mastered the cardinality of the digits from 1 to 9…Matsuzawa then introduced the concept of zero. Ai picked up the cardinality of the symbol easily. Whenever a square appeared on the screen with nothing in it, she would tap the digit.”
So human beings are not the only ones to understand the concept of zero and what it means these days. Even chimpanzees do.
But one individual who does not seem to understand the concept of zero is Finance Minister P Chidambaram. He said on Friday that the government of India did not incur any losses by giving away coal blocks for free, while the Comptroller and Auditor General (CAG) of India put the losses at Rs 1,86,000 crore.
“If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued,” said Chidambaram. So what he essentially meant was that the government incurred zero losses by giving away the coal blocks for free.
Let’s go into some detail to try and understand why Chidambaram does not understand – or pretends he doesn’t – the concept of zero, his education credentials of having studied at Harvard Business School (HBS) notwithstanding. But then, even George Bush studied at HBS.
Between 2004 and 2011, the government allocated 218 coal blocks to private sector and public sector companies (including ultra mega power projects). Of these, the major allocations were made between 2004 and 2009 with only two allocations being made in 2010 and 2011. Twenty-one allocations made during the period have since been cancelled.
“If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued,” said Chidambaram.
These coal blocks were given away for free. This was done in order to increase the total coal production in the country. The government-owned Coal India Ltd, which accounts for 80 percent of the total coal production in the country, hasn’t been able to produce enough to meet the growing energy needs of the country.
Between 1 April 2004 and 31 March 2012, the production of coal by Coal India has increased by just 65 million tonnes to 436 million tonnes. This means a growth of 2.3 percent per year on an average.
Hence, to increase the overall production, the government gave away coal blocks for free so that power plants, including captive plants, are not starved of coal.
The CAG put the losses on giving away these blocks at Rs 1,86,000 crore. They used a certain methodology to arrive at the figure. First and foremost the blocks given to the public sector companies were ignored while computing losses. Secondly, only open-cast mines were considered while calculating these losses, underground mines were ignored.
The coal that is available in a block is referred to as geological reserve. But due to various reasons, including those relating to safety, the entire coal cannot be mined. What can be mined is referred to as an extractable reserve. The extractable reserves of these blocks (after ignoring the public sector companies and the underground mines) came to around 6,282.5 million tonnes. The average benefit per tonne was estimated to be at Rs 295.41.
As Abhishek Tyagi and Rajesh Panjwani of CLSA write in a report dated 21 August 2012, “The average benefit per tonne has been arrived at by first, taking the difference between the average sale price (Rs 1,028.42) per tonne for all grades of CIL (Coal India Ltd) coal for 2010-11 and the average cost of production (Rs 583.01) 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 Rs 150 per tonne has been made for financing cost. Accordingly, the average benefit of Rs 295.41 per tonne has been applied to the extractable reserve of 6,282.5 million tonnes calculated as above.”
Using this very very conservative methodology the losses were calculated to be at Rs 1,85,591.33 crore (Rs 295.41 x 6,282.5million tonnes) by the CAG.
These coal blocks, after being handed over for free, have been producing very little coal. Guidelines issued by the coal ministry call for captive blocks to start production within 36 or 42 months. According to CAG, these blocks were producing around 34.64 million tonnes of coal as on 31 March 2011. This is minuscule in comparison to the extractable reserves of 6,282.5 million tonnes that these blocks are supposed to have.
The fact that there has been very little production of coal is what Chidamabaram was referring to when he said that if coal has not been mined, how can there be a loss?
But this is a specious argument to make and in no way takes away the fact that the government of India gave away coal blocks for free. The CAG needed a method to calculate the losses on account of this. And it went about it in the best possible way. It essentially assumed that if the government had sold the coal that could be extracted from these mines it would have made around Rs 1,86,000 crore. In fact, by not taking into account the blocks given to public sector companies and and the underground mines, CAG underestimated the quantum of the loss.
The CAG can be criticised for not taking the time value of money into account. But the moot point is that whatever the assumptions made to calculate the losses, the resulting number would have been very big. And that is something that the government cannot shy away from.
Chidambaram is basically trying to confuse us by mixing two issues here. One is the fact that the government gave away the blocks for free. And another is the inability of the companies who got these blocks to start mining coal. Just because these companies haven’t been able to mine coal doesn’t mean that the government of India did not face a loss by giving away the mines for free.
All this does not change the fact that between 2006 and 2009 the Congress-led UPA government gave away 146 coal blocks to private and public sector companies for free. These blocks had geological reserves amounting to a total of around 40 billion tonnes of coal.
The CAG, in its report, points out that India has geological reserves of coal amounting to around 286 billion tonnes. Of this nearly 40 billion tonnes, or nearly 14 per cent, was given away free.
If Chidambaram still feels this means zero losses, then I guess we will have to redefine the entire concept of zero and mathematics. And this, during a time when even chimpanzees have started understanding the concept of zero.
The article originally appeared on www.firstpost.com on August 25,2012. http://www.firstpost.com/business/chimpanzee-ai-knows-what-zero-means-but-does-chidambaram-430073.html
Vivek Kaul is a writer and can be reached at [email protected]