All you Wanted to Know about the Coal Scam

All you wanted to know about the coal scam

 

What is the basic issue? 
Between 1993 and 2011, the government of India gave away 206 coal blocks for free to government and private companies.

 

So, if these blocks were being given away free from 1993, why so much commotion now?
The Comptroller and Auditor General (CAG), in a recent report, estimated that the losses due to the policy of the government giving out coal blocks for free amounted to Rs1.86 lakh crore.

 

Why is the Congress-led UPA government being blamed if the policy started in 1993?
Estimates made by stock brokerage CLSA suggest that only 41 out of the 206 blocks given away for free were allocated before the end of 2003. This means that 165 blocks were allocated between 2004 and 2011. The UPA government has been in power since May 2004. Hence, a major number of coal blocks were given away free during the UPA rule.

 

And how is Prime Minister Manmohan Singh involved in all this?  
The PM also happened to be the coal minister between 2006 and 2009. During this period, 134 coal blocks were given away for free. Estimates made by Nomura Equity Research suggest that between 2006 and 2009, the coal blocks given away for free had geological reserves of around 40 billion tonne. India has around 286 billion tonne of geological reserves of coal. This means around 14% of total geological reserves of coal was given away free during the period Manmohan Singh was the coal minister.

 

What was the purported reason for giving the coal blocks for free?
This was done to increase the total coal production in the country. The government-owned Coal India Ltd, which accounts for 80% of the total coal production in the country, hasn’t been able to produce enough to meet the growing energy needs of the country. Between April 1, 2004 and March 31, 2012, the production of coal by Coal India has increased by just 65 million tonne to 436 million tonne. This means a growth of a mere 2.3% per year on an average.

 

What is the reasoning behind CAG coming up with the 1.86 lakh crore number?
The CAG reasonably assumed that the coal mined from the coal blocks given away for free could have been sold at a certain price in the market. Since the government gave away the blocks for free, it lost that opportunity. This lost opportunity is what CAG has tried to quantify in terms of a number.

 

So, what were the assumptions that the CAG worked with?
While calculating the loss the CAG did not take into account the coal blocks given to the government companies. Only blocks given to private companies were taken into account. Further, only open-cast mines were included in calculating the loss. Underground mines were not taken into account.

 

How were the numbers worked out?
The total coal available in a block is referred to as geological reserve. Due to several reasons including those of safely, the entire geological reserve cannot be mined. The portion that can be mined is referred to as extractable reserve. The extractable reserves for the blocks (after ignoring the blocks owned by government companies and underground mines) came to 6,282.5 million tonne. This is equivalent to more than 14 times the annual production of Coal India Ltd. And this is the amount of coal the government would have been able to sell if it had not given the blocks away for free to private companies.

 

But that’s just coal in tonnes, how did CAG arrive at a loss of Rs1.86 lakh crore?
The government gave away 6282.5 million tonne of coal for free. It could have sold it at a certain price. Also, mining this coal would have involved a certain cost. The CAG first calculated the average sale price for all grades of coal sold by Coal India in 2010-2011. This came to Rs1,028.42 per tonne. It then calculated the average cost of production for all grades of coal for the same period. This came at Rs583.01 per tonne. Other than this, there was a financing cost of Rs150 per tonne which was taken into account, as advised by the ministry of coal. Hence a benefit of Rs295.41 per tonne of coal was arrived at (Rs1,028.42 – Rs583.01 – Rs150). The losses were thus estimated to be at Rs1,85,591.33 crore (Rs295.41 x 6282.5 million tonne), or around Rs1.86 lakh crore, by the CAG.

 

But isn’t Rs1.86 lakh crore a very big number?
Yes it is a very big number. But still a conservative estimate. The CAG does not take into account the losses on account of blocks given away free to government companies. As I had mentioned on an earlier occasion in this newspaper, the transaction of handing over a coal block was between two arms of the government. The ministry of coal and a government-owned public sector company (like NTPC). In the past, when such transactions have happened, revenue earned from such transactions has been recognised. A very good example is when the government forces the Life Insurance Corporation (LIC) of India to buy shares of public sector companies to meet its disinvestment target. One arm of the government (LIC) is buying shares of another arm of the government (for example, ONGC). And the money received by the government is recognised as revenue in the annual financial statement. So when revenues for transactions between two arms of the government are recognised, so should losses. Hence, the entire idea of the CAG not taking losses on account of coal blocks given to public sector companies does not make sense. If they had recognised these losses as well, losses would have been greater than Rs`1.86 lakh crore.

 

So, this number could have been bigger?
Yes. The other point to remember here is that the CAG had assumed extractable reserves of a conservative 73% in case of mines where mine plans were not available. Typically, extractable reserves are around 80-95% of geological reserves. The CAG has also been very conservative in calculating the benefit per tonne of coal by taking the average price of coal sold by Coal India Ltd. This price is typically the lowest in the market. Coal from other sources is very expensive. Coal India also sells coal through an e-auction. The price of coal sold through this route is higher than the normal Coal India price. As the CAG has pointed out in its performance audit of ultra-mega power projects, the average e-auction price for Coal India coal was Rs1,782 per tonne in 2010-2011. Imported coal sells at an even higher price. The landed cost of imported coal was Rs2,874 per tonne (based on NTPC data for November 2009), reports CAG. If these prices had been taken into account or a weighted average price would have been created using these prices as well as the average Coal India price of Rs1,028.42 per tonne, the loss number would have been higher than Rs1.86 lakh crore.

 

If all this is true, so what was that Chidambaram said about zero losses?
The Union finance minister P Chidambaram wanted us to believe that almost all companies which have been given free coal blocks have not started to mine coal till date. Hence, there are no losses. This is like saying that I gave away my house for free, but since the person I gave it away to is not able to sell it, hence I did not face any losses.

 

What about the argument that coal is a natural resource and hence, should not be auctioned?
People who have come up with this argument also need to realise that coal, like air, is not an unlimited natural resource. So air need not be priced because it is unlimited, but coal needs to be priced because it is limited. And if that had not been the case, the government would be giving away all the coal that Coal India produces for free.