Why CAG was soft on coal block allocation “windfall gain” estimates?

Atma Ram Kejariwal

The most important charge made by the CAG in its Draft and Final Report was that of  the Government’s legal authority to auction the coal blocks was not exercised. Coal blocks were allocated in an inefficient manner. This resulted in “windfall gain” accruing to the allocatees. In the Draft Report of  the CAG, this “windfall gain” was estimated to be Rs 10,673.03 billion or Rs. 10.67lakh crore for coal blocks allocation during the period 2004–2009. This period is generally referred as tenure of UPA-I under Prime Minister Dr. Manmohan Singh, who was also Coal Minister then.  The calculation of this “windfall gain” is based on following assumptions:

1.Windfall gain/ton of coal = market price/ton – production cost/ton. The figures of market price and production cost/ton pertaining to Coal India Limited CIL were taken. All types of mines viz. Open Cast, Underground and Mixed were considered. Finance cost was also considered. Base was considered as March 2011. All are reasonable base. In this case the figure of ‘windfall gain’ was taken as Rs. 322/- per ton.

2. Total estimated reserves as per geological and other methods of estimations as appox. 36,850 million metric ton, MMT for all the coal blocks allotted.

3. 90 per cent confidence in the geology of reserve was considered and accordingly potential of coal mining was considered as 33,169 MMT.

In its final report which was submitted by CAG to the Parliament the ‘windfall gain’ to allocatees was estimated to be Rs. 1.86 lakh crore. The biggest change from the Draft Report was the dramatic reduction in the ‘windfall gains’ from Rs 10.67 lakh crore to Rs 1.86 lakh crore. This change is due to:

*  Windfall gain/ton decreased by 8 per cent from Rs322/- in the Draft Report to Rs 295/- in the Final Report.

* Number of tons decreased to 81 per cent i.e. from 33,169 MMT to 6,283 MMT of coal. This is because the Final Report considers “extractable coal” (i.e. coal that could actually be used in production) as against the Draft Report, which considered coal in situ (i.e. coal in the ground without taking into account losses that occur during mining and washing the coal).

Decrease in windfall gain/ton of 8 per cent is debatable as in any business 8 per cent variation or change is big value. The 8 per cent change in profit of any company can becomes a boon or spell doom depending upon whether it is a profit or loss. For a moment even if we ignore this figure of 8 per cent, the decrease of 81 per cent in “extractable coal” is debatable and can raise eyebrows. With just 19 per cent of “extractable coal”, no private entrepreneur will venture in to the field. It will be interesting to find out what made CAG to change its heart. With available latest technology, modern machinery and equipments, etc. ‘extractable coal’ should be much more than 19 per cent.

Here one has to note that all these figures, quantities talked about in this CAG report pertains to only 5 years for the period 2004-2009. Any allocation made after 2009, i.e. during tenure of UPA-II with similar method of allocations will increase ‘windfall gains’ to the allocatees by proportionate value.

It is claimed by the government that these coal blocks were allotted for captive use. It is a general belief that performance of private sector is better than public sector units. In this case the cost of production/ton of coal for private players should be much less than cost of production/ton of coal to Coal India Limited, CIL. Latest technology, modern machinery and Equipments, optimum manpower, supposedly better management, etc. will contribute to much lower production cost/ton for private sector. Another factor which will improve performance/ increase profits of the private players is the distance of transportation of coal. Private companies should have begged those coal blocks which are close to their proposed power plants/ steel plants/ other proposed industry as compared to existing coal mines of CIL. This will also result in lower delivered cost of coal at point of utilisation/consumption. Lower pilferage of mined coal will further lower delivered cost of coal/ton.  All these add to sizeable gain to private players. If the private players begged coal blocks far away from their proposed ventures requiring large quantities of coal, should have raised eyebrows and government officials along with their political masters should have rejected such request of private players. It is not clear whether CAG analysed this angle or not. If not, this should have been analysed and made part of the report to make it more comprehensive.

These factors or analysis maybe or may not be mandated to CAG by our Constitution. But the biggest question that remains is what made CAG to change “extractable coal” figure reduce by 81 per cent. Even if one agrees that earlier figure in Draft Report was optimum mining  quantity not “extractable coal”, the revised figure down by 81 per cent is a low figure which helped in reducing “windfall gains” drastically from Rs 10.67 lakh crore to Rs 1.86 lakh crore. It was expected that CAG should have taken more realistic figure. The private players who got licenses for various coal blocks must have prepared detailed project reports for their proposed power plants/ steel plants/ other proposed industry along with coal mining project and submitted to respective government agencies. It will be worth to find out from those reports the figure of “extractable coal” considered in those reports.

All said and done one has to appreciate efforts made by CAG to check inefficient, arbitrary, favoritism working of government functioning with no moral, ethical values and utter disrespect to our Constitution. Let us hope that this and other such reports of CAG will discourage government official in future for wrong doings. Such reports will encourage them to work with honesty and they will muster courage not to obey unconstitutional directives of their political masters.