A confused policy on coal auctions

Ensuring transparency is all very well but it cannot be an excuse for poor decisions. India’s coal and power minister Piyush Goyal may want to keep this in mind before his ministry auctions fuel ‘linkages’ – a command economy legacy that we, in India, still consider precious — from State-owned Coal India (CIL).

Last month the Indian government decided to grant fuel (linkages) from CIL to non-regulated sectors like steel, cement and others — which operate in open market — through the auction route to ensure transparency.

The decision is regressive in nature and is out of sync with the government’s stated goal of doubling coal production to one billion tonnes in five years.

If the nation has mitigated the ‘fuel crisis’, as Goyal claims, it would have been a transparent as well as progressive step to scrap the system of linkages and replace it with forward auctions of fuel or other such open market mechanism to ensure supplies to industry.

India faced an unprecedented ‘coal crisis’ a couple of years ago, due to incoherent policies of the former Manmohan Singh government that saw a rush to set up power stations without much preparedness on the raw materials end.

Rampant corruption in allotting resources (either by arbitrary grant of linkages or coal blocks) had put all stakeholders — from banks and end-users to CIL — in the dock.

The ‘crisis’ didn’t last long. This is partly because the capacity augmentation was in excess of demand, particularly in view of slowing growth and the stretched financials of power distribution utilities.

Also, Goyal did a good job in ensuring a significant rise in CIL supplies over the last two years. The State-owned miner recorded nearly 65 million tonne growth in sales from 2013-14 levels. Considering the inadequate evacuation infrastructure in the country, this is a significant achievement.

But the net rise in domestic supplies was much lower as the auction of captive assets hasn’t had the expected effect. It ended up creating a new set of problems, resulting in a sharp drop in captive production.

Companies which had invested crores in end-use plants bid so aggressively for captive mines that it defied economic logic.

The trouble was most evident in the power sector, where electricity tariff is regulated. Almost all the seven generation companies that won captive mines promised zero production costs and offered huge revenues to the State for every tonne of fuel produced! True, the companies should be blamed for over aggressive bidding. But the reality is that they are not operating those mines on some pretext or the other due to serious viability concerns.

Before the de-allocation of captive assets by the apex court, nearly three dozen mines were producing nearly 50 mt coal. Today a little over half a dozen mines are producing 17-18 mt of coal.

Drop in captive production implies all those rosy projections about revenue generation are yet to materialise. Realising the mistake, the government paused auctions to the private sector.

The non-regulated sector has suffered the most in this fiasco. They were deprived of linkages since 2007. This was done on the pretext of allocation of captive blocks and to ensure that power sector gets the entire share of CIL production. But, this also rules out the chances of their involvement in the linkage scam.

The total CIL supplies to steel and cement sectors is approximately 25 million tonnes (against a total production of nearly 535 mt). That is barely 50 to 75 per cent of the requirement of the respective end use plants. The fuel supply pacts are so one-sided that CIL could get away supplying merely 50-60 per cent of the promised quantities. This is irrespective of the fact that non-regulated sector pays 40 per cent higher price for coal compared to power.

This made the non-regulated sector largely dependent on open market purchase of domestic fuel through CIL’s e-auction.

However, even that was disrupted by Goyal for nearly six months soon after assuming office. The decision was reversed in the face of major loss of profit opportunity to CIL. As the government forced CIL to direct entire production growth to power sector, that offers lowest price for fuel, the miner’s margins started sliding.

The sharp fall in prices of imported coal, coupled with a ₹300 per tonne rise in ‘Clean Environment Cess’ over the last two years squeezed the space for fuel price hike, ahead of CIL’s wage agreement in July this year.

With major State elections round the corner, the Centre clearly wishes to avoid the political risk of increasing power tariffs. So steel and cement will be forced to pay a higher price for fuel in the name of transparency.