There has been an unprecedented clamour
over the issue of allocation of coal blocks to private sector without following
any bidding or auction process. But lost in this din is the fact auctioning of
coal blocks will lead to an increase in the price of coal mined and hence will
cause a corresponding rise in power and steel prices. Coal minister Sriprakash
Jaiswal concedes that the prices of end produce generated through the auctioned
coal are bound to be high even though auctioning is a transparent way of
allocating blocks. “The price impact of bidded-out coal will be visible within
five years,” he reasons.
There is also a growing concern that
when coal blocks are allocated without auction, power companies are mandated to
ink Power Purchase Agreements (PPAs) with distribution companies to keep
electricity prices in check. But once the blocks are given through auction and
bidding, it will not be possible to compel companies to sign PPAs with the
government as they would be mandated to pay upfront for the entire block.
In its defence the government has
tried to argue that of the 57 blocks identified by CAG, only one has come into
production and consequently there is no loss to the exchequer. While CAG report
lambasts the government for following policies which led to purported benefits
worth `1.86 crore accruing to
private companies, it would be useful to see how other nations distribute their
coal assets to either their home-grown or foreign companies.
In coal-rich Indonesia prior to the new
mining law coming into effect in 2009, there was no tender or auction route for
allocation of exploration licences nor was there any price regulation. The
government used to issue mining authorisations (Kausa Pertambangan) or KPs,
which were based on taxation and other laws and regulations in place at the time
of inking the agreement. The taxes include dead rent in the contracted areas,
production royalties, income tax payable by the company, VAT, import duty etc.
The KPs were given to wholly-owned Indonesian companies. But under the new law,
the Indonesian government has envisaged granting fresh exploration licences
(Izin Usaha Pertambangan) or IUPs for specified coal-bearing areas. It is at
present in the process of demarcating areas which are free of environmental
constraints and have clear titles, with no conflicting rights. The IUPs also
provide for foreign investment in the new mining law, where rights are subject
to auctioning. The successful bidder is short-listed based on the price bid and
technical considerations. However, pending the issue of implementing regulations
which detail the auction provisions, the general view is that IUPs should not be
currently issued directly.
Auctioning will lead to rise in price of power and
steel, admits Jaiswal
In mineral-rich Australia the situation is
contrary in two of its provinces--Queensland and New South Wales. In Queensland,
there is no auction process and an exploration permit for coal mining is issued
based on the applicant company proving its technical and financial competence.
The aspiring firm has to apply for a mining lease which enables production and
is also gives it surface mining rights. The New South Wales province follows the
auctioning process. In this case the provincial government sets a minimum price
depending on the level of information available and the potential of the block.
The party has to commit to a work plan with a financial outlay and on top of
that may be required to pay a premium to the government.
Interestingly, in South Africa also there
is no bidding process and an exploration company has to apply for mineral
concessions. The evaluation criteria is based on financial resources, technical
competence, fair competition and the environment impact among other conditions.
The African nation’s government has also imposed another condition which
mandates that 26 per cent mining rights be reserved for the locals. Inspired by
this provision of the South African government, the Union mines ministry in
India had also incorporated a provision in the Mines and Minerals (Development &
Regulation) Bill 2011 that the miners must keep aside 26 per cent of their net
profit for the welfare of the locals residing in their mining zone, but owing to
intense opposition from the Planning Commission and the mining community, a
Group of Ministers watered down the provision, mandating them to pay an amount
equivalent to royalty only.
Under auction process, companies may not agree to sign
The United States of America (USA) also
does not follow the system of auctioning of coal mines and allocates them
through applications. One of the reasons for this is that in recent years the
demand for coal mining leases has dipped. The applicants interested in a
particular coal block are asked to submit their proposal quoting a fair market
price and based on the number of applications, a decision is taken to allocate
the block to an aspirant who quotes the higher price.
Under the present American allocation
system any adult citizen may obtain and hold a federal coal lease. But a foreign
company can hold interest in a lease only by buying stocks in a US corporation
which holds the lease and only if the laws of their native country do not deny
similar privileges to American citizens. However, they may not hold a lease of
units in a publicly-traded partnership.
Are we really unfair?
This triggers a moot question as to how
unfair the Indian government has been in allocating coal blocks through the
screening committee. When other coal-rich nations too have shied away from
resorting to auctioning in distributing their coal properties, expecting the
government to have incurred losses of `1.86
lakh crore by failing to introduce an auction process seems to be far-fetched.
Of course, there can be arguments that the blocks were allocated without putting
in place a price discovery mechanism, but then the intention was to ensure raw
material supply to private power producers and have adequate electricity
generation. With a senior bench of the Supreme Court also ruling recently that
auction cannot be the sole criteria for allocation of natural resources, there
needs to be a careful and comprehensive thinking on the policy that is going to
be adopted by the government.
law formulated in 2009
No tender or auction of exploration licences, no price regulation
Mining authorisations or KPs were based on taxation and other laws
Were given only to domestic companies
New South Wales:
Coal blocks are auctioned
No auction of coal blocks
Allocation through selection of applications
Foreign companies cannot apply on their own