Even as state governments are set to reap a windfall from the ongoing coal blocks auction, there are concerns that companies have bid unrealistic prices for the blocks.
In less than a week, auctions of 11 blocks for the power sector have netted around Rs 60,000 crore. In all, 204 coal blocks will be auctioned in a phased manner, following the Supreme Court’s order canceling the earlier allocations.
Coal Secretary Anil Swarup told CNBC-TV18 in an interview that it was not the government’s responsibility to tell the bidding companies on what they should be doing.
“I am hoping that the people who are bidding are doing so with their eyes wide open, which I am sure they are,” Swarup said, adding, “They must be having good reasons for bidding what they are."
He made it clear that consequences, if any, of irrational bidding would have to be borne by the companies themselves.
"I don't force them to bid in a particular manner. They have to bid for things in a manner that is viable to them. It is their call, they are taking the call,” Swarup said.
He said that around 80 blocks will be auctioned by March 31, and that prices would cool as more blocks came up for auction.
"Yes, there could be some intermediate distortion as the consequence of aggressive bidding, but that happens in any market related situation,” Swarup said.
“We are not taking the decision; the decision is being taken by those who are operating in the market. If they distort the bids, my hope is that the market itself will correct those bids," he said.
Swarup said the successful bidders would have to meet mining schedules mentioned in the tender document. If they fail to do so, their bank guarantees would be invoked.
He also said that there would be a cap of fixed costs of power companies, so that power tariffs do not increase. Swarup added that the government would ensure that the power companies do not inflate their fixed prices to pass on the bidding costs for the coal blocks to consumers by way of higher power tariffs.
He was confident that power tariffs would actually come down at the end of the coal block auctions.
“I have said this in the past (a cap on fixed price for power companies). If someone still wants to go ahead and bid aggressively, what can you or I do about it,” Swarup said.
He expects Coal India production to cross 500 million tonnes this year and rise up to a billion tonnes over the next five years.
Below is the transcript of Anil Swarup's interview with Latha Venkatesh, Sonia Shenoy and Pragya Bhardwaj on CNBC-TV18.
Latha: The forward bidding that we saw and the high premiums that several companies quoted, is getting a bit scary for bankers whom I spoke to. Will they be allowed to passed that on as fixed cost you think?
A: As far as the bidding is concerned, we should not be imparting wisdom to those that are bidding especially as a bureaucrat I would not like to tell them what they should do, I would presume that they would know what they are doing.
As far as the passing of the cost is concerned, it will be passed on in a different context altogether in fact on account of the reverse bidding, the tariff should come down. That is what this stipulation is. The subsequent forward bidding after the reverse bidding coming to zero -- the forward bidding amount will to go the state governments that is how this stipulation is.
Latha: The money goes to the state government alright but the money is being paid out by the companies, now when they bid for the fixed cost in the forthcoming power purchase agreements (PPAs), will they be allowed to factor in? I will tell you why this fear has come because in a separate context, if I am not mistaken, I heard Piyush Goyal say that fixed cost could get regulated or could get capped, if that is the case they cannot pass on this cost as part of their fixed cost right, the premiums?
A: The whole idea of this sort of a bidding was to keep a tab on the tariffs and that is what the government is committed that we will see to it that the tariffs don’t go up. If this results in increase in tariff, the whole purpose will stand defeated. So that is what the government is going to work towards.
Latha: So short point the premium will not be allowed as fixed cost?
A: I hope so because otherwise the tariff will go up.
Latha: The opinion from the industry and the bankers is that in that case the power plants will be unviable?
A: As I said, I would not be sitting here imparting wisdom to people who know more about business and finances. We had made it very clear -- the purpose of the auction. They had to take a call and they have taken a call and they have to finally take a call as well.
Sonia: What would your own thoughts be on the aggressive bidding process and what will happen from hereon because as we have seen in the past with the road sector as well, initially some of the bidders bid aggressively and then they could not service many of their projects, so in this case if some of these companies end up surrendering their coal blocks, what will the process be, will there be any penalty that will be levied on them?
A: They have given guarantees and those guarantees will be invoked in case they don’t do what they have promised to do.
Probably the scenario here will not be as bad as perhaps in the road sector or in the power sector otherwise because here, the exploration has to start and if exploration doesn’t start then not much of an investment would have been made by them. So subsequent bidding can happen on those blocks.
However, I am hoping for the best. I am hoping that these people who are bidding are bidding with their eyes wide open, which I am sure they are and they will live with it. I am sure they must be having good reasons for bidding. We are indeed very happy that had the bidding not gone the way it has gone, they would have blamed that we have not structured the auction in a manner and government has lost money. That was the clarion call for the past so many years that government has been losing money. Now that the government is making money, there are eyebrows being raised. So that is how it happens, that is how market settles, over a period of time it will settle down.
I would also like to inform hat we have started just with a few blocks. We have many more blocks to offer. In fact, during the current auction and allotment process, we will be looking at more than 80 blocks. So if that be the case then more and more supply will come in and probably the price will settle down.
Latha: The manner in which people are bidding it gives the impression that the industry is not at all sure of the availability of coal which is why the aggression, which is why they want to corner what little they can get 10 or 15 percent of their requirements. Can you give us some assurance about how many blocks will be auctioned in 2015 calendar itself, one, and point two, can you reiterate how much will Coal India’s output increase in this year and the next. I am asking for visibility only for 24 months? A: I am extremely glad that you raised this issue because I have been pointing out that the blocks on offer are not the only blocks that are on offer. As you would recall that we had to do something about those 42 blocks in schedule 2 and thereafter we added another 32 blocks in schedule three. So they were indeed originally 74 blocks. Now we are looking at more than 80 blocks before March 31. So that is quite a huge number before March 31 and I would like to show to the industry that more and more blocks would be offered even thereafter. So I don’t think there is any reason for them to bid aggressively on this count. If they are bidding aggressively on some other count I can’t say that but as far as availability of blocks are concerned there will be sufficient number of blocks but more than 80 is a good number before March 31 and I would like to go on record that even after March 31 the auction process will not stop because we have in all 204 blocks. The auction process and the allotment process will continue even after March 31, that is one. Number two, we are making a lot of effort to see that the Coal India production still in itself is random. This year we are seeing record production, we are already ahead by more than seven percent over last year and we are hopeful that we will cross 500 million tonnes this year and we are looking at, and I have been saying that in the past as well, Coal India board has approved a plan for ramping up production from the current levels this year of 500 million tonnes to a billion tonne in the next five years and action is already under way. So a lot of work has been done in terms of ensuring that coal becomes available in the country and there is nothing to fear on that front.
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Pragya: Nobody is taking away the fact that a lot of work is being done but we cannot take away the fact that schedule II bidding has been extremely aggressive, you yourself have tweeted about it as we all understand but my point is, I want to rephrase Latha’s question. Given the fact that for the power sector the reverse bidding actually started at zero and went into negative, the variable cost will actually be zero for a lot of these companies. Do you think the companies will find a way to sort of gold plate their fixed charges going forward in order to bid for Power Purchase Agreement (PPA) because if that happens then as a ramification of when the PPAs are actually floated, for a lot of these companies the end tariffs will actually go up, will actually on three years from now when the PPAs get floated, it will defeat the end purpose of the government of keeping a tab on the overall tariffs. So, while we may achieve our purpose today, we may not be able to actually achieve it say maybe three years from now when they want to make some under recoveries on variable cost by gold plating on the fixed charges? A: You can rest assured that we will ensure that this does not happen, that they are unable to gold plate and get these tariffs go up. We have done it so far; we will do it in the future as well but let me take this point to you. The problem is that if there is lesser bidding, you ask a question that why is the government losing money.
I raised this point earlier also. Now that the government is getting more money everyone is again getting concerned. So, what is the option available, do you have one? Latha: I am not here to discuss options here. My only fear is that the solution to the coal ministry should not become the problem of power ministry and then the problem of the finance ministry because bankers are clearly worried that some of the power companies they have lent to are going to be unviable. Will there be a cap on fixed costs when the PPAs come up?
A: Obviously, I have said that. We are trying our best to ensure that the tariffs don’t go up. I have announced that in the past. If someone still wants to bid aggressively what can you and I do? We have been announcing time and again, repeatedly on your channel and on other channels that we will not allow the tariffs to go up. If despite that someone bids aggressively and goes through the top what can you and I do? If you have an option please tell me. Latha: Let me just get a little more detail about these PPAs itself. Several companies that have bid do not yet have PPAs. The coal that they mine will have to be given free to Coal India now until they sign the PPAs? A: Not free. There is a stipulation that till such time that you sign a PPA at a particular price that is determined in the tender document they will have to give it to Coal India, that is the stipulation. Latha: Then the chances are that they may not want to even take that trouble because that price may not necessarily be very profitable for them. So, is there a chance that that much coal will not get mined at all? A: If they don’t mine then they pay a price for it as well. As per the mining plan they have to mine. I hope someone reads the tender document very carefully, we have looked at all these aspects and they are there in the tender document and that is why I keep saying I hope all the bidding is happening with their eyes wide open. If they haven’t read that then that is their problem. Pragya: Some more clarity on merchant power sale, 15-20 percent can actually be sold by a lot of these companies on merchant basis. Can you tell us at what price will that power be sold irrespective of what the companies have bid at least as far as the reverse bidding is concerned, can they go ahead and sell it at market price because that would actually hedge some of the under recoveries which the companies are making at least in the interim? A: It is 15 percent and not 15 or 20 percent. 5 percent is a lot of coal. We don’t determine the price at which they are going to sell the coal but what we tell them that for this mining they will pay a different premium to the state government. It is not the one they have bid otherwise. It is a different premium for the regulated sector and for the non-regulated sector. So, the premium to be paid is different for the power that is sold in the commercial sector and at what rate they sale the power in the commercial sector is none of our concern.
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Latha: With the premiums that these power companies pay to the state governments, will that also have to be adjusted for inflation? A: Yes, the tariff determination is adjusted through inflation, that is my understanding Latha: Tariff, yes, but premiums. Pragya: It is indexed to the inflation right now. A: If you look at the document it is indexed. Latha: Which inflation? WPI or CPI? A: It is Wholesale Price Index. Pragya: Do you think it would make a better case actually to index it to the international coal prices. Currently the international coal prices are at a bottom. Do you think that the government can explore that possibility in the future as well? A: Finally I have got a suggestion from you. Right from the beginning I said as of now I have all the answers, we have some of them but these discussions help us to get some answers. I have got a very good input and we will examine it. Latha: Let me come to the coking coal mines. There were only three of them, one has gotten cancelled because there is only one bidder. The other one has three bidder and the other one has five. The one with three bidders have they all qualified because if one of them doesn’t qualify then even that will get cancelled? A: I don’t have the details of that particular mine. Certainly if one of them gets disqualified we will have to re-auction it. There is no other option. Latha: Are you worried about the viability of the metal companies. The international landed prices of metals, both aluminium and steel are crashing. In the last couple of weeks steel prices have crashed by USD 30, from USD 450 to USD 420 the landed prices we understand. Precisely at that time the raw material price is going through roof as it were. Almost Rs 4,000 per tonne for some companies which have bid at that level. You are going to create a problem of terribly weak metal companies aren’t you? A: Try and understand I am secretary coal. I would redesignate myself to secretary worried if I took all your worries with me. As I keep saying we have numerous problems that face the coal sector. I am really focussed on those. I am quite hopeful that the industry that is involved in producing something would be equally worried about what they are doing. If I can solve my own problems they will be able to solve their problems. I cannot comment on their behalf, I don’t force them to bid in a particular manner. I don’t ask them to do a particular thing, why should I in fact they have to do it in a manner that makes thing viable for them. What can I do sitting here as secretary coal and tell them I have a greater wisdom than you, you bid in this manner. It is their call, they are taking that call. I would suggest, as one suggestion came to me some of your colleagues can give suggestions as well.
Latha: Well, the coal minister is also the power minister as well. In the cabinet it is collective responsibility so if it falls on the plate of the steels ministry or the finance ministry as unviable steel companies and unrestrained rise in NPLs, it is going to be a government problem so while you may have solved today’s problem haven’t you created problems for the finance ministry? A: I am talking to you as coal secretary. You ask this question of the person that you are mentioning. I would look into the coal sector. If there is a problem and we are not creating the problem by the way. The problem was created when the4 blocks were given away just like that. Today we are getting money for the state governments and as you might be aware that this money is going to the poorest of the poor states. If that be the case, you say that I am creating problems for the country; I will disagree with you because the value that was there, the intrinsic value of coal which was not being realised is now presently being realised and passed on to the people who deserve, the poorest of the poor in this country and that region of the country. So, I do not think the problem is getting created. Yes, there could be some intermediate distortions as a consequence of aggressive bidding. I happens in any market related situation, otherwise we regulate the whole market and regulate it in a manner that then you will criticise that everything is regulated. We have left it to the market forces; we are not taking a decision. The decision is taken by those that operate in the market. If they distort the market, my hope is the markets itself will correct. What is expected of coal ministry to do? Stop the auction, put a lid on the auction, put a lid on the bid, what do you do? So, as one of your colleagues gave me a suggestion about international prices, I would suggest you give it a thought and give me another suggestion what should coal ministry do? Latha: Well, can you give us some idea of how much coal output you expect in FY16 from the country? A: Let’s take a look at how things are moving. Of the initial schedule II blocks which are 42 in number, the peak rate capacity is about 90 million tonnes. I am informed that only 35 million tonnes were being extracted. Given the desperation of the industry in bidding, I would presume that the entire 90 million tonne will be extracted within the next financial year and that is the right presumption going by the aggressive bidding that they have had. There would be some blocks of schedule three that may also be mined. So, we are looking at around 130-140 million additional tonne coming from the non-coal India sector which is quite a huge number given that coal India did about 500 million tones this year and we hope to ramp up the production next year as well. I am hopeful that we should be able to meet substantial amount of domestic demand, both from coal India as well as the coal that will be mined from schedule II and some of the mines of schedule III. Latha: You have allowed swapping of mines. Now obviously they are each being bid at very different prices. Do you foresee a lot of problems in this swapping and will you have to come with regulations? A: Though I might appear very confident sitting here, there have been innumerous problems in what we are doing and I do foresee some problems in swapping as well. We are working on the regulations because some notification has to be brought out in terms of enabling swapping. We are working on that and we will come out with those regulations. Latha: Can you give us a broad outline as to what are the problems you foresee and therefore on what lines we should expect these rules? A: There will be a time for it because I will come down maybe for another interview for that.
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