Indian coal allocation scam: CAG Rs.185,591Cr. /- Supreme Court has given strong judgement !

coal blocks allotted, not auctioned, leading to estimated losses as per the Comptroller and Auditor General of India Supreme Court cancels all 214 coal blocks allocations since 1993. Government to e-auction the coal blocks now.

http://www.ndtv.com/video/news/news/haven-t-admitted-in-top-court-something-went-wrong-attorney-general-to-ndtv-on-coal-scam-304646

1992–2010. Background to Coalgate: history of coal allocation in India

The coal allocation process

“In July 1992 Ministry of Coal, issued the instructions for constitution of a Screening Committee for screening proposals received for captive mining by private power generation companies.” The Committee was composed of government officials from the Ministry of Coal, the Ministry of Railways, and the relevant state government.”A number of coal blocks, which were not in the production plan of CIL and … SSCL, were identified in consultation with CIL/SSCL and a list of 143 coal blocks were prepared and placed on the website of the MoC for information of public at large.”

Findings by High Court of Orissa (2011)

Coal allocation guidelines

The guidelines for the Screening Committee suggest that preference be given to the power and steel sectors (and to large projects within those sectors). They further suggest that in the case of competing applicants for a captive block, a further 10 guidelines may be taken into consideration:

  • status (stage) level of progress and state of preparedness of the projects;
  • net worth of the applicant company (or in the case of a new SP/JV, the net worth of their principals);
  • production capacity as proposed in the application;
  • maximum recoverable reserve as proposed in the application;
  • date of commissioning of captive mine as proposed in the application;
  • date of completion of detailed exploration (in respect of unexplored blocks only) as proposed in the application;
  • technical experience (in terms of existing capacities in coal/lignite mining and specified end-use);
  • recommendation of the administrative ministry concerned;
  • recommendation of the state government concerned (i.e., where the captive block is located);
  • track record and financial strength of the company.

Results of the coal allocation program The response submitted in response to the 2011 PIL at Orissa on the allocation process between 2003 and 2009 was spectacular, with some 44 billion metric tons of coal being allocated to public and private firms.By way of comparison, the entire world only produces 7.8 billion tons annually, with India being responsible for 585 million tons of this amount.Under the program, then, captive firms were allocated vast amounts of coal, equating to hundreds of years of supply, for a nominal fee.

Year of allocation Government Companies Private Companies Power Projects Total
No. of blocks GR (in MT) No. of blocks GR (in MT) No. of blocks GR (in MT) No. of blocks GR (in MT)
Up to 2005 29 6,294.72 41 3,336.88 0 0 70 9,631.6
2006 32 12,363.15 15 3,793.14 6 1,635.24 53 17,791.53
2007 34 8,779.08 17 2,111.14 1 972 52 11,862.22
2008 3 509.99 20 2,939.53 1 100 24 3,549.52
2009 1 337 12 5,216.53 3 1,339.02 16 6,892.55
2010 0 0 0 0 1 800 1 800
Total 99 28,283.94 105 17,397.22 12 4,846.26 216 50,527.42

Out of the above 216 blocks, 24 blocks were de-allocated (three blocks in 2003, two blocks in 2006, one block in 2008, one block in 2009, three blocks in 2010, and 14 blocks in 2011) for non-performance of production by the allocatees, and two de-allocated blocks were subsequently reallocated (2003 and 2005) to others. Hence, 194 coal blocks, with aggregates geological reserves of 44.44 billion metric tons, stood allocated as at 31 March 2011.

Source: Draft CAG Report, Table 5.1.

Given the inherent subjectivity in some of the allocation guidelines, as well as the potential conflicts between guidelines (how does one choose between a small capacity/late stage project and a large capacity/early stage project?) it is unsurprising that in reviewing the allocation process from 1993 to 2005 the CAG says that “there was no clearly spelt out criteria for the allocation of coal mines.” In 2005 the Expert Committee on Coal Sector Reforms provided recommendations on improving the allocation process, and in 2010 the Mines and Minerals (Development and Regulation) Act (MMDR Act), 1957 Amendment Bill was enacted, providing for coal blocks to be sold through a system of competitive bidding.

The foregoing supports the following conclusions:

  • The allocation process prior to 2010 allowed some firms to obtain valuable coal blocks at a nominal expense
  • The eligible firms took up this option and obtained control of vast amounts of coal in the period 2005–09
  • The criteria employed for awarding coal allocations were opaque and in some respects subjective.

March 2012. Draft CAG Report on Coalgate 

Overview

The CAG report, leaked to the press in March as a draft and tabled in Parliament in August, is a performance audit focusing on the allocation of coal blocks and the performance of Coal India in the 2005–09 period. The Draft Report, stretching to over 100 pages—far more detailed and containing more explosive allegations than the toned-down Final Report of some 50 pages—was the document that sparked the Coalgate furor. The Draft Report covers the following topics:

  1. Overview (pp. 1–2)
  2. Audit Framework (pp. 3–4)
  3. Institutional Framework (p. 5–10)
  4. Gaps in Supply and Demand (p. 11–17)
  5. Coal Blocks-Allocation and Production Performance (p. 18–55)
  6. Production Performance of CIL (p. 56–83)
  7. Conclusion and Recommendations (pp. 84–88)
  8. Annexures (pp. 89–110)

As far as Coalgate is concerned, the key passages of the Draft Report are in Chapter 5, where the CAG charges that:

  • In 2005 the Government had the legal authority to allocate coal blocks by auction rather than the Screening Committee, but chose not to do so.
  • As a result of its failure to auction the coal blocks, public and private companies obtained “windfall gains” of ₹10673 billion (US$160 billion), with private companies obtaining ₹4795 billion (US$71 billion) (45%) and government companies obtaining ₹5078 billion (US$75 billion) (55%).

The most important assertion of the CAG Draft Report is that the Government had the legal authority to auction the coal, but chose not to do so. Any losses as a result of coal allocations, then, between 2005 and 2009 are seen by the CAG as being the responsibility of the Government. The answer to this question turns on whether the Government could institute competitive bidding by an administrative decision under the current statute or whether it needed to amend the statute to do so.

The CAG devotes ten pages of its report to reviewing the legal basis for an auction, and comes to the following conclusion:

“In sum there were a series of correspondences with the Ministry for Law and Justice for drawing conclusion on the legal feasibility of the proposed amendments to the CMN Act/MMDR Act or through Administrative order to introduce auctioning/competitive bidding process for allocation of coal blocks for captive mining. In fact, there was no legal impediment to introduction of transparent and objective process of competitive bidding for allocation of coal blocks for captive mining as per the legal opinion of July 2006 of the Ministry of Law and Justices and this could have been done through an Administrative decision. However, the Ministry of Coal went ahead for allocation of coal blocks through Screening Committee and advertised in September 2006 for allocation of 38 coal blocks and continued with this process until 2009.”

Other parts of the report, however, suggest that while an administrative decision might be sufficient legal basis for instituting competitive bidding, the “legal footing” of competitive bidding would be improved if the statute were amended to specifically provide for it. i.e. there were some questions around the legality of using an administrative decision as the ground for an auction process under the current statute. Quoting the Law Secretary in August 2006:

“there is no express statutory provision providing for the manner of allocating coal blocks, it is done through a mechanism of Inter-Ministerial Group called the Screening Committee … The Screening Committee had been constituted by means of administrative guidelines. Since, under the current dispensation, the allocation of coal blocks is purely administrative in nature, it was felt that the process of auction through competitive bidding can also be done through such administrative arrangements. In fact, this is the basis of our earlier legal advice. This according to the administrative Ministry has been questioned from time to time for legal sanction. If provision is made for competitive bidding in the Act itself or by virtue of rules framed under the Act the bidding process would definitely placed on a higher level of legal footing.

So while the CAG certainly makes the case that the Government had legal grounds on which to introduce competitive bidding into the coal allocation process, saying that there was “no legal impediment” to doing so perhaps overstates their case.

Second CAG charge: “windfall gains to the allocatees were ₹10673 billion (US$160 billion)

If the most important charge made by the CAG was that of the Government’s legal authority to auction the coal blocks, the one that drew the most attention was certainly the size of the “windfall gain” accruing to the allocatees. On pp. 32–34 of the Draft Report, the CAG estimates these to be ₹10673 billion (US$160 billion) with details in the following table:

Windfall Gains to Allocatees (in ₹ crore)
Calendar Year Government Companies Private Companies Government + Private Companies
90% of GR in MT Windfall gain historic rates Windfall gain Mar 2011 rates 90% of GR in MT Windfall gain historic rates Windfall gain Mar 2011 rates 90% of GR in MT Windfall gain historic rates Windfall gain Mar 2011 rates
2004 1,709 45,807 56,949 0 0 0 1,709 45,807 56,949
2005 1,388 34,056 45,561 1,776 39,146 85,523 3,163 73,203 131,084
2006 8,660 185,119 259,547 3,011 62,085 111,764 11,671 247,204 371,311
2007 7,000 64,066 207,098 1,747 38,284 51,502 8,746 102,350 258,599
2008 288 6,704 7,364 2,682 54,445 80,137 2,970 61,149 87,501
2009 303 2,438 11,285 4,605 99,735 150,574 4,908 102,174 161,859
Total 19,349 337,471 587,803 13,820 293,695 479,500 33,169 631,166 1,067,303

The table employs the following calculations for windfall gain:

  • windfall gain/ton = market price/ton – production cost/ton
  • windfall gain = windfall gain/ton x number of tons allocated x 90% (to reflect 90% confidence in the geology of the reserve)

Note that while the windfall gain/ton is fairly modest ₹322 (US$4.80), because of the vast size of the coal allocations, the total figure for the windfall gain is very large. Note also that the figure stated as a windfall gain would in fact accrue to the allocatee over the life of the reserve, which would likely exceed 100 years. Thus, using any reasonable discount rate, the Present value of the windfall gain will be dramatically smaller (perhaps one tenth) of the windfall gain stated in the CAG Report.

While the headline number of ₹10673 billion (US$160 billion) was sure to attract the attention of the public, in the Annexures to the report the CAG listed the windfall gains by company, allowing readers to see who exactly benefited from the allocation program, and by how much. The resulting list, a veritable Who’s Who of Indian commerce, ensured that the topic of coal allocations would be one of the most written about stories of 2012.

Source: Wikipedia

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