Making sense of coal block allocation scam and CAG report

Everything you wanted to know about the scandal (but were too confused to ask)


Prasanna Mohanty | September 3, 2012

Scene from a protest event organised by the BJP Yuva Morcha in New Delhi
Scene from a protest event organised by the BJP Yuva Morcha in New Delhi

1. What’s the coal block allotment scam all about?

Going strictly by the CAG report, 57 captive coal blocks were allotted free of cost to private companies in an arbitrary and opaque manner between 2004 and 2009. The government had decided to go for auctioning of coal blocks by competitive bidding way back in 2004, but did not implement it. Instead, it continued with the old arbitrary and opaque practice. The rules for auctioning – after an amendment in the Mines and Minerals (Regulation and Development) Act – were notified only on February 2, 2012. No auctioning meant a huge loss to the exchequer and financial gain to the private companies to the tune of Rs 1.86 lakh crore.

Details of the findings are as follows:

Arbitrariness: Until 1993, there were no specific criteria for allocation of coal blocks. In 1993, a new process was started in which allocations were made on the recommendation of an “inter-ministerial screening committee”, headed by the coal secretary.

The CAG report says during the period under review “there was nothing on record in the said minutes (of the screening committee) or in other documents on any comparative evaluation of the applicants for a coal block which was relied upon by the screening committee”.

In one case, out of 182 applicants, only two were scheduled to make presentations before the screening committee, which then went on to recommend six companies for allocation. “Thus, a transparent method for allocation of coal blocks was not followed by the screening committee,” it said.

The Times Now news channel accessed the minutes of the screening committee and exposed how 17 private companies were allocated coal blocks in a single meeting even though they did not turn up for presenting their case.

The CAG report also pointed out how mindless allocation of coal blocks to private companies caused huge losses to public sector company Coal India Limited (CIL). The guidelines for allocation clearly state that coal blocks offered to the private sector should be “at reasonable distance from existing mines and projects of CIL in order to avoid operational problems”. But this was violated and Reliance Power was given Moher and Moher-Amlohri Extension blocks for its Sasan power project which resulted in the sharing of boundary with CIL subsidiary Northern Coalfields Limited (NCL)’s existing Amlohri opencast project. As a result, NCL couldn’t access coal reserve of 48 million tonnes of its coal and also reduced its project life from 24 years to 20 years. Similarly, the sharing of boundary of Nigahi opencast project of NCL with Moher-Amlohri Extension resulted in reduction of mineable reserves by 9 million tonnes.

Non-auctioning: The CAG report says that in 2004 the coal ministry itself made out a case for auctioning of coal blocks saying. In a note, the coal secretary said “…since there is a substantial difference between price of coal supplied by Coal India and coal produced through captive mining, there is a windfall gain to the person who is allotted a captive block…”. The note also said that “…the bidding system will only tap a part of the windfall profit for the public purposes…”. The PMO agreed.

But prevarications started immediately and legal opinions were sought. The law ministry took two years to say (in 2006) that auctioning could be started either through administrative instructions or by amending the Mines and Minerals (Regulation and Development) Act of 1957. Despite clear advice, the coal ministry continued with the old practice and allotted 71 more blocks (net) between 2004 and 2006. In all, 142 coal blocks were allotted to public and private entities since 2004.

Finally, the law was amended in 2010 but the rules for auctioning were notified only on February 2, 2012.

Windfall gain: The CAG estimated financial gains to the tune of Rs 1.86 lakh crore for the private companies. Its calculation is based on average cost of production and average sale price of opencast mines of CIL in the year 2010-11.

The audit excluded 12 coal blocks allotted to ultra-mega power projects (UMPP) as these were allotted on the basis of tariff based bidding in which coal blocks were included in the bids.

2. How valid is the government’s criticism of CAG’s findings?

The government has disputed all three major findings of the CAG. It has maintained…

1. That allocation of coal blocks through the screening committee was transparent and fair.

This claim flies in the face of facts presented by the CAG (and narrated earlier).

2. That it would have been “undemocratic” to go ahead with auctioning because some of the state governments were opposed to it.

True, some states were opposed to it. So, how did the government overcome the problem? The CAG report gives a chronology of development to show that there was only one meeting held with the state ministers to sort out the matter, on August 10, 2009, nearly a year after an amendment to the MMRD Act was introduced in parliament. This meeting could have been held and the matter sorted out without being undemocratic in 2004. What prevented it? On the contrary, the CAG report shows how various ministries of the union government and the PMO actively participated in delaying the introduction of auctioning by raising one trivial issue after the other. This practice started in 2004 and continued till 2008. The amendment to the MMRD Act was passed and notified in September 2010. But the rules for auctioning were notified only on February 2, 2012. This shows how serious the government was to auction coal blocks.

3. That there was no windfall gain since only one of the 57 coal blocks has started production and the method used to estimate the gain was faulty. No gain will accrue to the companies they are not allowed to sell the coal in market but use it only for running their power or steel or cement plants.

These assertions are not correct. Valuation of a company goes up dramatically in the market after a high-value asset like a captive coal block is added to its kitty. It has come to notice that one such company in Maharashtra was sold off at 12 times its valuation after a coal block was allotted to it. In another instance, a private company was caught making a killing by selling coal in the market.

The CAG has also come for criticism on two more grounds.

1. The coal ministry says auctioning of coal blocks would have led to a higher cost of power.
This is a big lie. On the contrary, the CAG report points out how the coal ministry itself had been arguing that captive coal mining would mean cheaper coal to the private companies.

It says, “In the meeting held in the PMO on July 25, 2005 to discuss competitive bidding as a selection method for allocation of coal and lignite blocks for captive mining, it was observed that the rational method would ensure that the cost of coal through the competitive bidding route is less than that of coal sourced from CIL or imports. Secretary (coal) had then stated that the competitive bidding procedure will only tap part of the profit that accrued to the companies…While private captive blocks would be available to the allottees for their own needs alone they would not require to carry a huge cost of social overheads and excessive manpower like that of CIL or SSCL. It was thus clear that ministry of coal itself had argued that there was gain to the allottees of coal blocks”.

It says further, “Most importantly, the contention of ministry of coal in 2004-2006 when it was making attempts to introduce transparency/competition in allocation of coal blocks (that is, auctioning) was exactly along the lines of the conclusions of audit (CAG). The honourable supreme court, in the judgment on 2G spectrum has also directed to introduce transparency/competition in allocation of scarce natural resources”.

The CAG has excluded 12 coal blocks allotted to UMPPs from its calculation because these were based on tariff based bidding, meaning that their tariff was fixed. But that is not the case with other beneficiaries.

As the other CAG report on UMPP (tabled along with the one on coal block allocation) pointed out, Reliance Power stood to gain Rs 29,000 crore because it was allowed to divert coal from the coal blocks meant for Sasan UMPP to its Chitrangi power project. The Sasan UMPP got three coal blocks on the basis of tariff based bidding and will supply power at a fixed rate of Rs 1.196 per unit. The same coal will be available to the Chitrangi power project also but in this case power will be sold at a much higher rate, at Rs 2.45 per unit as per the agreement signed with the Madhya Pradesh government.

It still remains a mystery as to why Sasan UMPP was given a third coal block (Chhatrasal) and allowed to have surplus coal which it was then permitted to divert to another power project of the company.

It is to ensure that the private companies getting cheaper coal don’t go on to fleece the consumers by selling power at a high cost that the CAG strongly recommended in its report that “there is a need for strict regulatory and monitoring mechanism to ensure that benefit of cheaper coal is passed on to the consumers”.

2. V Narayansami, MoS in PMO, said that “CAG is not following its mandate”, meaning thereby that the CAG had no business commenting on selection process for allocation of coal blocks because that was a policy matter and fell in the domain of the government, not the auditor.

This is not a valid accusation. It was the union government (coal ministry and PMO) that had decided in favour of auctioning of coal blocks way back in 2004 but didn’t implement that, leading to loss of revenue to the exchequer. The CAG hasn’t questioned the policy. Rather, it has questioned non-implementation of the government’s policy.



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