Coal and punishment

Many allottees have been sitting on the coal blocks without utilising them.

Written by Kirit Parikh | Posted: October 8, 2014 

The prime minister said, during his trip to the United States, that he would use the coal allocation turmoil to clean up the sector. I suggest ways to do that without punishing the innocents and in a rational, transparent manner.

The Supreme Court’s revocation of allocations of all but four coal blocks out of 218 raises a question on crime and punishment. In allocating coal blocks by nomination, the Central government was at fault and the culprit. Some of the allottees may have given bribes, so they are also partners to the crime. But surely, not all allottees gave bribes? Taking away their coal blocks is to punish innocents. I thought our system of law ensures that no innocent person is punished, even if it means that many who are guilty escape punishment. The Supreme Court’s order is thus hard to understand, unless, of course, the court has evidence that all paid bribes for the allocation of a block.

Many allottees have been sitting on the coal blocks without utilising them. Some of them may have been delayed for want of clearances from the various government departments at the Centre and the state. Others may just have been hoarding the blocks. A severe penalty should be imposed on the hoarders, at least equivalent to the cost of importing an amount of coal equal to the shortfall in expected production. Some allottees have been selling coal to third parties, in violation of the law and the terms of allotment. They should also be severely punished and fined. These coal blocks should, of course, be taken over by the government. But the Supreme Court should have differentiated between the allottees, separating the guilty from the innocent.

Among the blocks revoked are 44 that produce some 38 million tonnes (mt) of coal per year. We cannot afford any disruption in production as we import more than 100 mt of coal every year. Importing that much more coal would not only burden our current account deficit but also push up the price of coal in the international market. Whatever the court’s reasons for its judgment, the pressing question now is what is to be done.

The first thing to be noted is that coal blocks are allotted only to captive users, such as producers of power, cement and steel. They are not allowed to sell coal to third parties. As long as the product is sold in a competitive market, as cement and steel are, the excess profit from the allotment of coal would only be the difference between the allottee’s cost of production and Coal India’s cost. This difference of cost can arise from a difference in efficiency or in the nature of the coal block.

If the captive miner is more efficient, then one should not grudge her the excess gain. If you recognise this, the CAG estimate of a loss of Rs 1.86 lakh crore is hard to understand. The only unearned gain she could have made is from the quality of the coal block, if the cost of mining is less than the cost incurred by Coal India. Coal blocks differ from one to another and so does the cost of mining. It is often claimed that the better blocks are cornered by Coal India and others are given poorer blocks, where the cost of production would be higher.

Recently, a spate of articles has suggested that coal blocks should be auctioned in a transparent, competitive way as soon as possible. However, they do not suggest how to account for the differences in the relative worth of coal blocks. Also, they do not suggest how this can be done without disrupting coal production. I suggest below a way to account for this, and to have a fair and transparent auction where the gains accrue to government, with minimum chances of production being disrupted.

We can assess the quality of a coal block. In the late 1970s, one of my students, Sudhir Chitale, in his PhD thesis, had econometrically estimated the cost of mining coal as a function of the various physical characteristics of a coal block, such as the depth of the overburden, and the thickness, slope and area of the coal seam. That cost function can be quickly updated for changes in relative prices and technological progress. With this, it would be possible to assess the relative worth of coal blocks.

Explore coal blocks to be auctioned thoroughly, to assess all characteristics that affect the output and cost of mining. Put this data on a website accessible to all bidders. A fee can be charged for access. The bidders will know the relative worth of different blocks and bid accordingly. The government will then capture the true worth of all blocks.

For the blocks that are already being mined, the auction could involve two parts. The current owner should price her capital stock. The coal block and the capital stock are auctioned separately. A bidder is not required to bid for the existing capital. The present owner can also bid. If the winning bidder for the block is unwilling to pay what the present owner demands for the existing capital, the latter should be required to take her equipment back by a pre-announced date. Of course, the winner of the block must be required to work it and produce coal as per a prescribed schedule, failing which a stiff penalty may be imposed — at least as much as the cost of import to make up for the shortfall in production.

The government should take this opportunity to denationalise coal and permit anyone to mine, not just captive users. It should also permit the sale of coal to third parties.

The writer is chairman, Integrated Research and Action for Development, Delhi, and former member, Planning Commission

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