One could replace ‘Coal’ with any the other resource and the title would still indicate the path most businesses end up taking once they are allocated a resource by the state . Auctioning a resource was touted as the fairest way to allocate resources and breaking the endless cycle of litigation. The Supreme Court in its order of February 2 ,2012 observed that while allocating natural resources through auctions, the doctrine of public interest within the framework of the Constitutional rights of the people has to be adhered to . But in a subsequent judgment the Supreme Court approved of any fair, transparent and non-discriminatory method of allocating natural resources and not just the auction route. Eventually the route chosen was to auction natural resources.
We have had some experience in allocating mining leases by bidding and one such example was highlighted in an article in the Business Line, which read - “Past experiences of the State Government for allocating mining leases by competitive bidding have not been encouraging. In 1991, Odisha suddenly realised that mining gemstones by the State-owned Orissa Mining Corporation was not remunerative and decided to auction gem-rich blocks by competitive bidding through Orissa Mining Corporation. The State Government identified 12 such blocks for aquamarine and sapphire in Bolangir and Kalahandi districts for a reserve price of INR 20 lakh. Out of 12, the State Government could auction only five blocks for INR 22 lakh, but these leased-out areas could not be worked subsequently to fetch more revenue for the State Government. Taking cue from Odisha, Andhra Pradesh identified seven blocks of gemstone for auction at a reserve price of INR 35 lakh, which fetched the State INR 5 crore on auction, but more than a decade has passed, and the leases have not been mined yet”
We could always claim that gemstones are not as precious as coal and not mine that line of thought.
Now this brings us to the auction of coal blocks. There were two methods used for coal auction :
- Forward auction for bidders seeking a coal mine that is linked to an end-use involved in the production of iron and steel, power generation for captive use, and cement.
- Reverse auction where the end-use is involved in power generation.
The auction was a resounding “success” . The figure that pretty much all papers highlighted as gains to the state governments was at around INR 2 lakh crore while the maths to that figure is still not quite clear. What that figures actually means is that over the lifetime of the mining plan for the auctioned blocks or over 30 years, whichever is lower, states stand to earn a ballpark figure of INR 2 lakh crore. The government has for this reason claimed in its official communications that it is 'potential revenue' for states from auctions, and not 'revenue’ . This important note was missed in the celebratory mood that enveloped the country post the two sets of auctions. In a nutshell companies need to start mining at full capacity as per the mining plan only then will this potential revenue turn into actual revenue.
Now some part of the ‘ potential revenue’ would also come from the reverse auction route and this is where things gets a bit foggy. Thermal power plants in India are reimbursed for the cost of coal by passing it through the consumer. So as to not increase the electricity tariffs for consumers due to the auction of coal, a reverse auction method was used. Here the company giving the highest discount to the electricity board would win the block. For eg if the cost of mining for two companies is INR 1000 and one offers to supply coal at 500 and the other at 750 then the company with the INR 500 offer would win the bid. In many cases the bids touched zero and then turned into forward auctions. What this means is that they would not charge the electricity board for the coal supplied and also for every ton of coal it mines it would pay the government. A double whammy for these mining companies. As per an article on the website Scroll which reads " In the case of Essar Power, which bid INR 1,100 per ton for a coal field and if we assume INR 400 for cost of mining that would mean roughly for every ton mined it would have incurred a cost of INR 1500 with no way of recovering the cost from consumers". This raises the possibility of some companies turning sick and tariffs being renegotiated and a later date. As per a note from an investment bank ,10 Indian conglomerates collectively owe about INR 8 lakh crore to their bankers, and account for 13 per cent of all bank loans in India. Further debt would be needed to ride this tiger. As Chidambaram in his column writes “Irrational bids will lead to inevitable outcomes: price (or tariff) increase, failing which defaults;” The answer to the question as to who would eventually pay for all this ‘potential revenue’ might just be us. Until then let us keep counting the zeros of the 2 lakh crore figure and feel good.