How the Coalgate cookie crumbles

The recent report by Comptroller and Auditor General has opened a can of worms on captive coal block allocation policy and ‘windfall gains’ to private sector companies. The auditor, however, kept dispensation of coal blocks to government companies — mostly owned by the State governments — out of the ambit of ‘Coalgate’.

Theoretically, it can be assumed that public sector companies will pass on full benefits of asset allocation to the nation, either in terms of cheap electricity, providing coal to smaller consumers at a fair price, or paying handsome dividends to the government.

But the reality could be rather different.

Asset distribution

Starting from 1993, public sector undertakings (PSUs) were offered nearly half of the 195 blocks allotted so far, at free of cost. In comparison with the private sector, the State sector was offered bigger assets — 70-odd companies, out of a total of 289 allottees, grabbed approximately 60 per cent of the geological reserves — and, on a priority basis.

Barring a couple of Central government undertakings, nearly 90 per cent of such assets went to State Government-owned companies. The biggest beneficiaries are the six coal-bearing States of West Bengal (11), Orissa (4), Chhattisgarh (8), Jharkhand (10), Madhya Pradesh (10) and Maharashtra (5), together cornering nearly half of the allocations through this route. Among the non-coal-bearing States, Karnataka is largest gainer with six captive assets.

The asset distribution coincided with the rise of a section of private miners — most of them unlisted and enjoying the strong backing of local politicians. They entered into mine development and operation (MDO) contracts with PSUs.

Usually, PSUs enter into a minority joint venture (26:74) with the private miner. The joint venture in turn holds the mining lease, making it difficult for the PSU to change the miner in the event of any dispute. What’s more, details of sourcing arrangements between the PSUs and the private miner-run ventures are rarely made public.

Windfall gains

State-owned companies allowed private miners to tap part of the benefit accruing from access to a captive asset free of cost. A case in point is West Bengal. Beginning mid-1990s, the State generation utility entered agreements with a private miner — EMTA group. Under this arrangement, the cost of sourcing captive coal is 19.5 per cent cheaper than the price of identical varieties of coal produced by Eastern Coalfields (ECL). Incidentally,

ECL charges the highest price for its offerings — arguably due to its abnormally high cost structure — in the CIL family. The model allows the private miner, who is not legally bound to incur high costs on account of social obligations as in the case of Eastern Coalfields, to earn ‘windfall profits’ as and when CIL escalates prices. The national miner has tweaked prices at least thrice since 2009, primarily to meet the rising wage bill for its four lakh workers.

The sacrifice is made by the end consumer of electricity, who pays an unduly high price for fuel sourced from a captive asset. The State utility so far sourced nearly 4-5 million tonnes of coal a year, from its four captive assets, through this route. The anomalies came to light recently, when the new State government appointed a consultant to switch over to cost-linked pricing formula for developing new assets.

Not just Bengal

West Bengal may not be an exception. Recent media reports suggest that Karnataka government utilities also entered into similar arrangements with the EMTA group for captive mining. EMTA mines assets of at least two more States and central PSUs.

The importance of the pricing arrangement became apparent in a recent CAG audit on Chhattisgarh Mineral Development Corporation. The auditor felt that the company entered into a mining contract (for Bhatgaon-II extension block) that was favourable to the single bidder for the project. The potential revenue loss is estimated at a little over Rs 1,000 crore.

Undoubtedly, these are sketchy details. But, they surely point at the possibility of unearthing many more skeletons in the cupboard.

When State is the miner

The possibility of unearthing a major scam may increase manifold, if one takes a closer look at the asset utilisation pattern of the State government-owned commercial miners.

A preliminary estimate suggests that commercial miners were allotted approximately 43 assets, nearly half of the total allotments to PSUs. Of these, nearly 34 blocks went to six coal-bearing States. The top awardees in this segment are Madhya Pradesh State Mining Corporation (10) and Jharkhand State Mineral Development Corporation (8). Miners from Bengal and Chhatishgarh were awarded 5 assets each. Even smaller States like Assam or Arunachal Pradesh were not deprived.

Available information suggests that in a majority of the cases, the State-level miner re-‘allotted’ mines in favour of select private sector players who are meant to be end-users of coal. It implies such mines were practically converted into captive assets of a chosen few.

Apparently, States do it as part of concession agreements to attract investment. In a majority of the cases, the beneficiaries operate in the open market, implying that they pocket a clear margin generated from lower cost of captive production vis-à-vis price of CIL supplies.

But that’s only the tip of the iceberg. In most cases, the State Government miner also allows the private beneficiary to sell coal in the open market, in case the end-use plant is not ready. Considering the latest e-auction prices, it means an opportunity to earn nearly double the price of CIL coal.

To put it simply, it is therefore beneficial for the private sector beneficiary of such assets to go slow on setting up of an end-use plant and mop-up huge margins through open market sales of coal.

Yes, a part of the ‘windfall profit’ is shared with the state-owned miner but it is a smaller share. The conditions vary from agreement to agreement, depending upon the whims and fancies of the political masters and the private beneficiary.

In a striking coincidence, many such beneficiaries (of assets owned by the State miners) also managed to get captive assets through the screening committee route.

The West Bengal Mineral Trading Development Corporation (WBMTDC), for example, re-‘allotted’ majority of its coal assets to at least three companies in the sponge iron and steel sector.

These three companies were also offered captive blocks by the Union government, following the State government’s recommendation. And, one group has managed as many 5 captive assets through five different companies.

The bottomline is that a substantial part of the benefits granted to the state sector may have been diverted to private sector. How the State fared in these deals is indicated by the health of WBMTDC.

The State Government-owned miner, which exploits only one of the five coal assets allotted in its favour, has the unenviable record of posting losses for years and decades, in a row.