SENSEX NIFTY
May 09, 2013, 03.56 PM IST | Source: CNBC-TV18

Coal India losing $20bn, corrupt cos gaining: TCI's Hohn

The founder of the USD 6 billion The Children’s Investment Fund is best known in India for taking on the government against what he calls 'unfair pricing of coal'.

Chris Hohn

Fund Manager, The Children's Investment Fund

More about the Expert...

Christopher Cooper-Hohn is counted among UK's most successful hedge fund managers. However, the founder of the USD 6 billion The Children’s Investment Fund is best known in India for taking on the government against what he calls “unfair pricing of coal”. 

TCI, which has a minority stake in Coal India , has been accusing the PSU of not protecting minority shareholders' interest and harming the company. It has also initiated legal action against the PSU by filing a petition before the Kolkata High Court.

Also Read: Govt keen to offload stake in Coal India by September

"The government has not raised prices on coal in nearly two-years. As a result with inflation, coal pricing is falling in real terms,” Hohn said in an interview to CNBC-TV18.  "It remains a gigantic economic loss for the Indian people, approximately USD 20 billion a year of lost profits, which should be going to the Indian people as the 90 percent shareholder of Coal India," Hohn said. 

He says politically connected companies to the Indian government are receiving fuel supply agreements (FSAs) at half market price or a third of market price for coal. It is a system that encourages corruption because not everybody can get coal at half price. So obviously there is a massive incentive for companies to pay bribes in order to get FSA contracts.

As a result, he says, the companies that get coal do not charge low prices but just extract monopoly and profit margins from the benefit of the cheap coal. So, there is a lie that has been told to the Indian people that cheap coal benefits them. But Hohn says it does not benefit investors of Coal India at all.

“If you price the coal to market, the USD 20 billion of extra profits of Coal India could be distributed to the poor Indian people. 40 percent of the population has no access to electricity. The beneficiaries of cheap coal are not the poor people of India but actually rich industrialists who are willing to pay bribes in order to get the FSA coal at cheap prices,” he said.

Below is the verbatim transcript of Hohn's interview on CNBC-TV18.

Q: You run a very successful hedge fund but in India everybody knows you as the man who is running a crusade against the government on Coal India on what you think is a very unfair pricing of coal, where do things stand on that front right now?

A: The government has not raised prices on coal in nearly two years. The cost of the company has been escalating very strongly. As a result with inflation, coal pricing is falling in real terms. So, there has been no progress at all on the coal pricing issue. It remains a gigantic economic loss for the Indian people, approximately USD 20 billion a year of lost profits, which should be going to the Indian people as the 90 percent shareholder of Coal India.

It is solely because politically connected companies to the Indian government are receiving fuel supply agreements (FSAs) at half market price or a third of market price for coal. It is a system that encourages corruption because not everybody can get coal at half price so there is a massive incentive for companies to pay bribes in order to get FSA contracts.

As a result, the companies that get them, do not charge low prices, they just extract monopoly and profit margins from the benefit of the cheap coal. So, there is a lie that has been told to the Indian people that cheap coal benefits them. It does not benefit them at all.

If you price to market, the coal, the USD 20 billion of extra profits of Coal India could be distributed to the poor Indian people. 40 percent of the population has no access to electricity. The beneficiaries of cheap coal are not the poor people of India but actually rich industrialists who are willing to pay bribes in order to get the FSA coal at cheap prices.

Q: Are you completely opposed to the signing of the FSAs with these private companies?

A: We are happy for them to sign FSA contracts as long as the volumes make sense and so do not mind the contracts that have been signed. But they cannot force the company to sell at discounts to market prices, which they do not.

So the actual contracts that have been signed, I am not opposed to it. The issue is not to guarantee some volume to customers that is okay, the simple issue is that if the market price of coal is USD 70, you cannot sell it for USD 25 in return for companies paying a bribe. That is not right for India.

What is bizarre about the whole situation is that we as foreigners entering India, are the only people who are shouting about this. You have the Comptroller and Auditor General (CAG) of India write a few more reports saying that the whole coal block allocation process was fraud and corrupted - very valuable coal blocks being given away for free to connected people to the Indian government. The same point is true about FSA contracts. We have asked the CAG of India to launch a review into why this is also not being auctioned.

Supreme Court (SC) of India has ruled the natural resources, which belonged ultimately to the people of India are best allocated through a transparent auction process. The whole pricing of FSA coal at giant discounts persists because the scale and money involved is so giant, USD 20 billion a year, big enough to finance the large political parties in their campaigns.

1 2 3 4
Set email alert for

ADS BY GOOGLE

video of the day

Upbeat on Indian mkt; steep fall unlikely: Morgan Stanley

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.