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Opaque and dubious auctions: Difficult to locate the fair price for coal in a non-transparent system

The government claims the coal block auctions were meant to ensure two things: One, get the fair value of coal and, two, to do so with transparency. Coal Minister Piyush Goyal has often talked of the two. But the lack of transparency has made it impossible to judge if the government achieved the first - a fair value for the exchequer from the coal blocks auctioned.

The government has decided not to reveal the price bids that were made by different competing companies before the winner got the coal block. It has only revealed the winning bids. Rather than being transparent, the process has got mired in controversy with the government cancelling some of the auction and companies taking it to court.

The data could reveal patterns of how companies bid and provide hints of any wrongdoing. But, the coal ministry told Business Standard, "The data set of price bids of companies constitutes a part of their bid strategy. The companies can rightfully claim that this is a commercial secret, as it is based on their assessment of cost and revenue particular to their company."

But Rohit Prasad, associate professor at MDI, Gurgaon, says, "The government could have released data for each bidding round and the bid amounts without revealing the names. This would have maintained anonymity." But with the bid data missing all one can attempt is to draw anomalies or patterns from what is available.

Take the case of Gare Palme IV/2 and IV/3 - two blocks auctioned as one, reserved for the power sector, through a reverse auction that went in to forward bidding. The joint coal block in Chhattisgarh has an extractable reserve of 155.49 million tonnes - 15 per cent of all the reserves reserved for the power sector in this round. It was auctioned under reverse bidding for Rs108 per tonne. In comparison, take the Sarisatolli block of the same mix of coal quality, which went for Rs470 per tonne.

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Because this was a reverse auction that went in to forward bidding, the winner of the Gare Palme block, Jindal Power Limited would be able to pass through a cost of Rs100 (reserve price) out of this to the consumers when electricity tariff is set by the regulatory authorities. Net, Jindal would have to bear Rs8 per tonne. Compare this to the Sarisatolli case where the winner, CESC Limited would have to bear Rs370 as its own cost - 46 times more. The companies would both bear the cost of mining and other charges additionally.

Such anomalous cases of large price differential appear not only in coal blocks for power companies but also in the ones auctioned to sectors such as steel and cement, where the government cannot control the prices of the companies' end-product.

Take the case of Meral coal block in Jharkhand, which held some of the best quality coal but went for just Rs727 per tonne when much lower grade coal was auctioned for more than three times. Even if one were to compare the winning bid with the CIL average price for the coal grade in Meral block at Rs3,490, the winning bid was just a fifth.

One rationale for the aggressive bidding could be to maintain business continuity. The costs of leaving a plants idle could be more than that for securing coal supplies. Second, even the high bids could look better than the only other option - importing coal. Third, the power companies could assume that they would renegotiate the electricity tariffs and pass on a part of the higher costs to the end consumers. This matter has already been tested once in the courts and continues to simmer.

Even if one was to discount the costs of transporting coal from faraway points and other additional costs to the specific power plants, the wide variation in winning bids does not add up. Questions remain as to why competitors did not smell the chance to step in to raise the bid more and yet stay much below the comparable Coal India grade prices.

The coal ministry justified the large variance in prices by saying, "While the successful bidder is best suited to answer why he bid a particular price as beauty lies in the eyes of the beholder, coal mines can be valued on different parameters like amount of extractable reserves, grade of coal, distance from end use plant, ease of working, stripping ratios, etc."

But the ministry has decided to review nine winning bids, say newsreports quoting the coal secretary. No wrong-doing has been alleged so far. No reasons have been given except that the bids were 'outliers'. In the courts, the government has so far not tried to claim collusion or any wrongdoing as the reason for cancellation of select auctions. The cases are still on-going.

The inter-ministerial group reassessing the bids, it's been reported, has given a clean chit in one case. But, the report has not been made public.

The bidding regulations allowed subsidiaries of the same company to bid as competitors. This is not a usual practice. Prasad says, "In telecom, cross holdings are not allowed to bid. But, the impact of subsidiaries of the same company bidding for the same block will depend on how many unique bidders are there."

The coal ministry responded saying, "While this decision could have been debated before the auction started on the ground that it might lead to reduced competition, the outcome of the auction has shown that this has not happened even though in many cases multiple bids were received from a single company."

Under the new coal regulations, the government also holds discretion over which coal blocks are to be reserved for which sector. By giving away the coal to specific end-users to dig for their own needs rather than auctioning it to miners who would then sell it in open market to end-users has led to other complications besides the lack of discovering a real 'fair value' of the national asset.

Vinayak Chatterjee, chairman of Feedback Infra, says, "At a broader level, the fact that national resources are being auctioned is a good step but what is worrying is that it is a truncated auction. What has essentially happened is that a single resource has been broken up into many price buckets - for steel, power etc."

He adds, "What this process has done is distort prices at source. While one can understand the social objective of wanting to keep prices low, tinkering at source is problematic. Pricing should be uniform."

The policy to reserve blocks for sectors has caused its own complications. Each coal block has several grades of coal available in different ratios. Power plants require low grade coal in comparison with steel or cement which need high quality coal. A steel plant sitting on low grade coal would now prefer to sell it to a power company or swap it. At the moment the government has allowed swapping only within a sector that too with prior permission.

The coal ministry justified it saying, "Broadly speaking, lower grades of coal are for power generation and better grades of coal are for unregulated sector. There is no possibility of loss to the exchequer, as the valuation of the entire mine consisting of different grades has been done." But again this has been challenged in courts, now.

Some experts aver that instead of providing captive mines to end-users (at a price, unlike in the case of UPA) the government could have taken the opportunity arising from the cancellation of blocks by the Supreme Court to open the sector for commercial mining. "The restrictions imposed were unwarranted. They should have opened it (coal sector) up," says Chatterjee.

The government is now readying for a third round of auction and has put the idea of a coal regulator on the backburner.

source: http://www.business-standard.com