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Growing demand triggers diversity in mine allotment process, Infraline Plus Team, InfralineEnergy

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.

Indonesia

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

 

Australia

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.

South Africa

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 PPAs

United States

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.

Indonesia

New mining law formulated in 2009

Then:

  • No tender or auction of exploration licences, no price regulation either

  • Mining authorisations or KPs were based on taxation and other laws Were given only to domestic companies

Now:

  • Fresh exploration licences or IUPs are granted for specified areas

  • Foreign investment allowed Rights subject to auction

Australia

Queensland:

  • No auction, exploration permit given on lease based on competence of the company

New South Wales: Coal blocks are auctioned

  • Bidding company has to commit to a work plan with a financial outlay

South Africa

  • No auction of coal blocks

  • 26 per cent mining rights reserved for locals

United States

  • No auction of coal blocks

  • Allocation through selection of applications

  • Foreign companies cannot apply on their own