Coal auction method ignores many considerations: Muthuraman

The whole nation has been talking about the coal blocks allocation for some time now. In this special show, Indianomics, we will focus on coal with a difference. Not a session on name calling and blame gaming but we will focus on how to chart future policies on coal in particular and natural resources in general. India, as we like to say, has the third largest reserves of coal and is still the third largest importer of coal, often for grades that are available in India. That's a clear admission that policies have gone wrong. So, what's an ideal mining policy?

Today we have two stalwarts in the area of coal, production and use, B Muthuraman, vice-chairman, Tata Steel and Partha Bhattacharya, former CMD, Coal India. Below is the edited transcript of the interview. Q: You have looked at mining policies in five continents, before we started this, I did a dipstick survey from a bunch of companies asking them what has been their mining experience in other countries – most of them said that auction is not very common but there were a list of countries which they mentioned, a few countries in Africa where auction is resorted to but that is not the ubiquitous experience. Is auction the way to go at least because it is fair? Muthuraman: Auction is a simple, transparent method and with no doubt and any criticism. But auction does not take into account many things. For example, a mineral resource of a country is owned by the population of that country. It belongs to the people of that country and it is held in trust by the state, by the government. There are three stakeholders in a mineral resource. Public, government and the developer.
We must ensure that all the three stakeholders are equitably and fairly benefitted. Auction does not take care of that. Auction is in a while it maximizes the revenue upfront to the state it does not take into account environmental considerations, society considerations and other factors. So auction is not a widely prevalent method.
Q: That can be ensured through rules isn’t it? You transfer 25% of your profit to the area where you mine – you can auction and still say that these rules will prevail? Muthuraman: In a mineral resource the benefits to the developer comes overtime of over 25-30-40 period during the life of a mine. The society benefits in terms of employment generation, cascading effects of value addition, other benefits like infrastructure development and many things, the benefits to the society also happens over a period of time. Therefore, it is only logical that the benefit to the government also flows over a period of time. Q: Would you really object to the auction method. There are added problems which some miners said that, we have no guarantee over land acquisition in India, no guarantee over environmental clearance, no guarantee of the quality and the grade of resources available. They are perfectly, legitimate arguments. But grade and quality and the extent available is not even known for instance in oil reserves but we nevertheless do competitive bidding for any LP unless if you are going away from the auction method India in its current state needs very strong reasons? Bhattacharya: There is little difference between India and other countries. We have to appreciate the difference in the situation as far as coal is concerned.  In other country drilling is done by a government body, very minimal kind of a drilling, regional exploration as our GSI does based on that information the government allots the blocks. Sometimes they don't resort to auction because they give exploration contracts right at the beginning.
Two eligible applications are sort and then once the exploration is done that can be converted to mining licence. This is the kind of thing that other counties do follow while allotting initial blocks which are unexplored.
In India, in addition to Geological Survey of India (GSI) many exploration done by CMPDI (Central Mine Planning & Design Limited) which is a subsidiary company of Coal India Limited and as a result of that exploration much more information, much more quality information is available for most of the blocks, particularly the full explored blocks with proven reserves.
In order to prove the reserves the government has spend money, made investments which normally in other countries is done by the person to whom the block is allocated for exploration license. There is a basic difference here.
Once that explored block is available to the government, government can think in terms of getting the best value for it. I agree with Muthuraman that auction can be avoided and maybe should be avoided. In situations where the end products are sold not at a market determined prices but at a regulated price and it is necessary for the end product to be available as cheap as possible.
In power, explored blocks even those are allotted for power generation one can avoid auction, one can go for a stipulation that the power has to be sold through a long term PPA and subjected to some sort of a regulation or through a price bidding. If it is sold through long term PPA with regulator then how do you really allot a block to a particular bidder or agency. For making the process transparent that score one may have to go for a surrogate of auction and there could be several surrogates that can be designed. Q: How do you design surrogate?

Bhattacharya: If there is no cash outflow and the bidder is told to indicate the time stream of cash outflows to a particular state government where the coal block is on account of royalty and he indicates the timeframe like 1-3 years or more and that is collapsed into a present value, whosoever indicates the higher present value he is considered as the number one bidder.
 
It can be securitizing, it can be guaranteed with bank guarantee mechanism which is not expensive.  So, there is no cash outflow right at the beginning but the method becomes quite transparent. There is a competition among the various bidders for a particular block. So, this kind of a process can be evolved, that also helps incentivizes the block to come into operation at an early date. Q: Does that make sense to ask people to commit to a forthcoming stream of revenues? Muthuraman: India is a special case and has certain uniqueness in terms of its minerals. India is a mineral scarce country for most minerals. Per capita resource of this country is much lower than many countries where resources are available. So we need to take extra care to ensure that there is indeed a value addition. We should not have a situation where a mine is allotted to someone who is not going to add value otherwise we are not benefitting the country as a whole.
A good process is one where you invite applications and then you have well defined criteria. Often the issue is not the process in India in my view. Even today we have a reasonably good process and this process that we are having today is a process which has evolved over last 30-40 years and at every stage the process has improved and today.

Q: I don't think that argument and conclusion will be bought, look at the names of companies that are being and almost everyone admits that there is only corruption. Muthuraman: If you don't follow the process properly, you will have undesirable effects. So don’t blame the process. You blame the implementation of the process and following the process properly. Q: But at least the process will try competition for the least? Muthuraman: If you take the issue of delays that are being talked about. The ministry of coal had stipulated 42 months for open cost and 54 months for underground mining. In a normal process, it takes 104 months. But things don't happen in a normal way. There are delays, sometimes there is a go no go by the MoEF, there is a situation where you got this environmental cumulative pollution index and so on which stopped everything from happening for several months.
I know specific cases where the allocation has been made in 2005, till today the land has not been acquired, the forest clearance has not come and the mining license has not been obtained. So the production cannot start.
So the issue is not the process alone. You need to perfect the process. The current process can be vastly improved but it is also a fact that the current process is a vastly improved process over what we have had in the last 30-40 years.
It doesn't make the current process perfect. You can improve the process but then you have to implement the process and you have to have obligations from both sides. If somebody says you must start production from this month, of those 17-18 steps that are involved in from allocation to production, somebody must take responsibility for given it at that point in time. Latha: But if the process has been perfected over the last 30-40 years then why is it that a large number of corrupt cases are emerging in the last 10 years because there are clearly phony licenses. There are genuine companies over there with genuine delays but that should not obfuscate the fact that there have been several more times of phony cases.
_PAGEBREAK_ Q: Do you believe that the time has come that we should open coal mining to the same process that we use for other bauxite mining or for iron ore mining. Just allow that to be not a nationalized commodity. Has the time come to call that the Coal Nationalization Act to be scrapped? Bhattacharya: We can definitely think in terms of that provided we can take care of the ills that actually let to nationalization. Coal was not nationalized till 1970s. Why was it required to nationalize. There were certain basic problems. Who checks whether slaughter mining goes on or not, who checks whether the mining is scientifically done or not? Do we have that kind of regulatory environment in the country to ensure all that and that’s the big question because those were the factors and then the treatment to the workers, the amenities provided to the workers and all these problems which were there that led to nationalization. So are we going to revisit those ills? Q: There has been enough political awakening over the decades that now at least it can go to private parties you think? Bhattacharya: I disagree with that because I know that private companies who are into coal mining pay much-much less and there is no reason why people engaged in this arduous and difficult, hazardous profession should get anything less than the industry standard wages. So we do not have a mechanism even to implement that. So how can we think in terms of denationalization or scrapping the bill and not revisit the ills which were prevailing prior to nationalization. Q: What would you ideal criterion be - we cannot wish away the ills that have happened? Bhattacharya: We cannot wish away but it can be improved. We should have a tight eligibility criteria other than those who are eligible as per laid down criteria nobody else should be considered even for a block and those should be based on capability, experience of mining, capital, financial resources and other factors and having obtained a list of such companies who are interested to mine a particular block, you must then follow a transparent mechanism to decide who should get it and in trying to follow that you have to have at some point of time some sort of a bidding. Q: Some element of bidding you will agree is what is the way forward? Muthuraman: The word bidding has certain connotation today. We need to understand the criteria. If somebody says I want to do so much more to the society, I want to employ more people, I want to do more downstream so that more people can be employed I would include them as a criteria. Q: How do we disentangle the tangle that we have already got into? There are people who we have not been able to fulfill their licences for the past 9-10 years and there are those which are obviously corrupt licences. What is your way forward to get out of the mess? Bhattacharya: First of all we should identify which of the blocks have been developed more or less commensurate to the schedule or at least there is a reasonable explanation for the delays. In such cases the blocks should continue with them, there is no need for scraping.
As long as the blocks belong to power generation, the blocks have been given for power generation but a stipulation has to be added, if the stipulation is not there that it has to be sold through a long-term PPA under a regulated price. So that takes care of the gain or benefit. The benefit gets sucked out and goes back to the people of India.
The question is if the blocks are allotted to other than power in that case one has to be little careful and has to be decided on a case to case basis. Then there are companies who are doing mining even prior to nationalization and they were allowed to continue to do mining later.
There are hardly three four companies. Like Tata Steel and SAIL. So if these companies have been given blocks of coking coal, I don’t see anything wrong in that because they have a mining experience. But other than these if coal blocks have been given free for steel making or for cement manufacturing or for sponge iron and all these products are sold at marketable prices why should a block be made available free to them that question has to be properly appreciated and answered. I think for those cases one has to look into case to case basis. Q: Is there a retrospective royalty charge that should be added into the contract? Muthuraman: In any case royalty is a part. There is a notion that is prevailing that the blocks have been given away free of cost to people. That notion is completely incorrect. Q: CAG can't be that wrong? Muthuraman: The way to calculate a benefit or a cost is to take into account all aspects. There is a capital cost so there are capital related charges. There is an operating cost, royalty cost, cess, clean energy cess, MADA and corporate tax. If you add all these then it comes in the region of 34-36% of the sale value of coal. It goes to the government as royalty and cess and various other revenues. That needs to be taken into account. Q: But there is a coal expert, a man who has headed it for 30-40 years who is telling you that there are instances of windfall gains as Bhattacharya says and the auditor says? Muthuraman: First of all this calculation is not easy. It can only be indicative and approximate. But in that calculation everything need to be taken into account. The fact that there is a price of coal over a period of time. It is not at USD 150-180 or USD 300 all the time. There have been times when the coal prices have been only USD 30.
So somebody needs to take a call or an expert opinion has to be taken or look at the historic past as to what has happened in the last 30 years. How the coal prices have varied? Then there is a production cost which is different from different mines. Underground mines have a different production cost, much higher compared to the opencast mines that need to be taken into account.
India has the highest amount of cess royalty taxes for minerals in general including coal compared to most countries of the world. So, all things need to be taken into account. Then one needs to find out as to how much goes to the government. So there is no windfall profit except perhaps at a certain point in time. Bhattacharya: That once a block is properly explored it always gets into different value mode and when an explored block is allotted, because investment has been done to explore the block, normally blocks are allotted in other countries without detailed explorations. Any detailed explored block will always have a value. For example very recently Rio Tinto in Mozambique paid USD 5 billion for getting a block.
Therefore blocks do have value once it is fully explored, one has to appreciate that and in India whatever we may say the coal is being priced at half the world prices and still Coal India is making a decent amount of money. So there is a value to this coal. We can see from e-auction. Whenever we do e-auction we get 70-80% more price, why? Because the market prices are higher and once you get that kind of a market price, if you want to get that market price you need to pay something for getting an explored block. Latha: The consumer of coal believes that the current process of a screening committee look at all kinds of conditions but implemented with more rigour by a regulator is the way to go forward, well I would still believe that the auction process or competitive bidding needs a look in. Bhattacharya, believes that it’s not yet time to denationalize coal and that it should continue in the present process with Coal India being the lead miner, again a conclusion which I cannot agree to.
We do have to think about denationalizing this commodity so that we have perhaps more competition and therefore less scrambling for a mining license just so that you can sell it at a premium. There have been objections to allocation, auction method from our panellists, but my sense is that the way forward is that we have to allow some kind of auction, some kind of competition, maybe a great deal of conditions thrown in to ensure that societal considerations, sharing of the mining profit with the local population, ensuring labour relations or labour conditions are maintained.
These will have to be done through a regulator. It is a hybrid process that we have to evolve. We can't stick with a screening committee which clearly has not served us well.