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The CAG Coal verdict

Over these days, much being said about the CAG's report on the coal allocation gains, the position of Indian coal industry, challenges and way forward. The likes of reliances, bhushans, adanis, essars being hammered in the report has actually triggered my interest to write something that I have always been considering convention, as in India, this goes an every day meal.

No wonder, the CAG seems to be on fire with Mr. Vinod Rai, making breakthroughs in all reports starting from 2G scam to the coal thing now.

Going through first of the cag's report and finding that the cag is entirely right to assess that the companies have gained out of allocations done for their captive use. Let's try to understand as to what the industry is about and how does this report writes another breakthrough on the untold things.

1. The Indian coal industry

- coal in india is the most important source of power generation and it contributes to more than half of the current commercial energy requirement

-as on April 2011, the country has 285863 million tonnes of geological coal reserves(includes trio- proved reserves, indicated reserves and inferred reserves)

-The estimated annual demand of coal in India is ~750 million tonnes , of which power contributes to about 450, captive power plants- 68.5, steel-33, cement -47million tonnes.

- India since ages has never been able to meet its demand, resulting in imports which are in the tune of 68.92 million tonnes for 2010-11.

-Coal India Limited is India's monopolistic coal company operating through seven subsidiaries and meeting 81% of country's coal demand. It operates out of 471 coal mines

- the regulatory agencies in the coal sector include
A. Ministry of coal
B. Coal controller's organization(CCO)
C. Central Mine Planning and Design Institute Limited (CMPDIL)

- The coal mines were nationalized in two phases- 1972(coking coal mines) and 1973(non coking mines)

- In 1976, the amendment in nationalization act took place, all private lease holders except iron and steel producers were allowed to carry operations

- In 1993, the indian companies were allowed to engage in the generation of power and use coal for their captive use. Later in 1996, the cement sector was also allowed for captive use.

- 100% FDI allowed for captive mining in 2006

2.What does the CAG report says?

The trigger to cag's report also comes from the government's assumed failure in meeting its mission - Power to all by 2012. With all drivers in place, backed by huge coal reserves, it seems that there are numerous flaws that need to be corrected if the coal dream has to come true.

Some of the key takeaways out of the report are :

I. The annual drilling capacity had to be 1.5 mio metre, though the current average comes to just about 0.35 mio metre, it comes to poor 23%.

II. The cil has never been able to map the targets set by planning commission. There have been discrepancies in the excavation and transportation capacities as well

III. No monitoring mechanism has been put in place for assessing the end use of coal being done by the small and medium enterprises.

IV. The dereservation of over 48 coal blocks to enhance capacity has not yielded right results. No assessment done

V. No transparent mechanism to allot coal blocks to companies for captive use. the financial gain to these companies have been in the tune of INR 1.85 lac crores.

VI. Abnormal delays both in initiation of production and statutory clearances for mining leases

VII. No physical verification systems in place for assessing captive mines

VIII. The bank guarantees taken for coal mines are either inadequate or have lapsed, the total value comes to INR 311 crore

Such eye openers may mean nothing to the government, as said, it goes a breakfast meal to them, but for the analysts, the readers of India, it really questions the structures and systems set up for such large industry setups.

3. Who are beneficiaries

For a gain of INR 1.85 lac crore, the companies that stand to gain out of 57 blocks are :
-Usha Martin
-Bhushan Steel
-Essar and Hindalco
-Adani Power
-JSW Steel
-Tata steel

And many more...

3. How can this be resolved?

The cag may be right to assert the anomolies, but their recommendation of holding auctions for selecting the coal blocks may not be completely adequate.

As the captive coal mines produce inefficiencies in its own system- the inefficiency in mining coal and converting coal into cement,steel or whatever. Also, the institutional efficiency is already in place. For the state monopolies if they play the complete role, the inefficiencies create a loss in bribes, plain loot of coal, and loss to potential corporate tax

I may have the least experience to suggest a way out for these issues, but going for the flawed auction system , with the bidding parameter being the upfront money for government, it is likely to add to the cost of coal. Since with the auctions and high biddings, the cost is likely to play a crucial role.

The only short term change we can look at is the delivery of the commitments and honouring of contractual terms

Just an insight, ankit

Sent from my BlackBerry® on the go
Apologies for typos


Shivam Trehan said…
Fabulous again. Well i must say, an arguably better insight than political insight we usually listen too :)
Keep writing....
Ankit Gupta said…
Thanks shivam, thanks a lot :):) be blessed.

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