Coal linkage auction to end discretionary allotment: Parakh

Bhattacharya says as of now the discount between linkage and imported coal has reduced due to lower international coal prices.

Below is the verbatim transcript of Partha Bhattacharya and PC Parakh's interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.

Sonia: What are your own thoughts on whether this process of auctioning of coal linkages will be successful and also in terms of what the appropriate auction methodology that should be used now?

Parakh: It is a very welcome step on the part of the government. I do not think that auction of linkage by itself will increase supply of coal to non-regulated sector because for extra supply of coal the production in the country must increase but it will end the regime of discretionary allocation of linkages to various companies and the companies will be in a position to take linkage of the kind of coal and source from which it wants and it will bring in complete transparency in the system of linkage, which had been non-existent all these years.

So I won’t say that it is going to suddenly increase the availability of coal for non-regulated sector but it is certainly going to bring transparency and give option to consumers as to where from they take coal and of what quality coal they take.

Reema: Do you see aggressive bidding now for these coal linkages because coal is such a scarce commodity and secondly in this coal linkages, you get coal at a discounted price so will we see very aggressive bidding because we have seen that in the case of the coal mine auctions?

Parakh: As long as there is a shortage of coal in the country, there is bound to be aggressive bidding because only alternative for people is to import coal and importing coal is not all that easy because there is a serious congestion at the ports and people are paying large amount of demurrage in keeping their ships lying at the ports for 15-20 days. So I am sure that there is going to be aggressive bidding for linkages also.

Sonia: Let me just take this point you made about the possibility of ending the regime of discretionary allocation of coal and that will be a big positive if it comes through. Would you agree with what PC Parakh is saying and more importantly when the coal auction took place, they took place at prices which were much higher than what was envisaged earlier. In this next auction where the coal linkages will be auctioned, how will the government manage to keep a tab on pricing in your mind?

Bhattacharya: I entirely agree with what PC Parakh has said and linkage in any case is a very valuable commercial kind of a benefit and getting it free of cost in a discretionary manner was certainly not the ideal thing to happen. So giving it away in auctions to the unregulated sector makes eminent sense.

However, to your question whether it will see bids being rationale and prices not going through the roofs, I have my own doubts because the way the corporates have bidded for the coal blocks, I don’t see too much of rationality in that. As you have rightly pointed out, this is coal at discounted price from Coal India of course the discount has substantially reduced in the last few months because of drop in international prices and Indian coal prices not reflecting that drop. So the discount is less today.

Having said that, it is still there, there is an assured supply from Coal India from one of the Coal India mines is definitely a very substantial kind of a value proposition to anybody. So there will be bids and the bids could be unrealistic because that is what we have seen in the coal blocks.

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Reema: What is the discount which is offered by Coal India or how much cheaper is the coal from India compared to say importing it,just to understand it?

Bhattacharya: As on date I believe the discount is not very significant. It used to be 50 percent or more, even 6 months back but with the international coal prices having come down 6 months or may be a year back, with international coal prices now coming to a low and Indian coal in any case is low in quality so after quality adjustment the discount is not very significant.

We have to also keep in mind that the transportation cost in India is fairly high so in terms of landed cost at a place which is at a distance from the domestic coal mines and may be closer to the coastal areas the discount could be even negative. There could be places in the country far of from the main coal fields but closer to the ports where the discount seizes to exist around it. I don’t say that there is a major discount at this point in time.

Sonia: Is there any clarity on what the quantity of coal is that will be available for coal linkages for all of these un-regulated sectors?

Parakh: I would feel that at least 10 percent of the Coal India’s production may go in for un-regulated sector through these auctions.

Sonia: What could be the tenure of these coal linkage auctions? I mean the opinion seems to be divided on that there are some panel members favouirng five years, some are suggesting ten years. What would be the most appropriate tenure of the auction linkages in your mind?

Parakh: It should not be less than 10 years. It could be more than 10 years but it should not be less than 5 years.

Reema: While the detail still have to be worked out by the Inter Ministerial Committee (IMC) but according to you what should be the pre-requisites of the end use plant to qualify as a technical bidder?

Parakh: Since it is still for a captive views, so could be that either there should be an existing plant or the plant should be in the region of state of getting into production those are the kind of conditions which government may put.

Sonia: What is a situation currently on the ground? This whole plan to auction coal linkages arouse after there were a lot of reports which suggested that the irregularities in granting coal linkages were just rising with a lot of these developers making false claims to take advantage of the discounted price etc. Have you noticed this as well and has the situation gotten worse?

Parakh: It is inherent you see when you have short supply of any commodity and there are large number of people waiting and whose entire financial calculations depend upon getting coal, irregularities are bound to happen and therefore it is a very welcomed step on the part of the government that instead of using the discretionary system whatever may be the background or whatever conditions you may impose there is nothing like free open auction for transparency.

Reema: Would you agree with PC Parakh's assessment that perhaps 10 percent of Coal India’s production could go via the coal linkages or what according to you would be an appropriate percentage?

Bhattacharya: In fact PC Parakh and I were responsible for introducing e-auction methodology.

In that subsequently when we debated, we thought that 50 percent of that 10 percent should be put under forward e-auction and that forward e-auction should be to only end-users. The other spot e-auction is meant for everybody. Even traders could bid for it but the forward e-auction was meant for only the genuine end users. It could be a good idea to examine whether the same concept could be used now to give it to end-users for a 10-year kind of a scenario under the forward e-auction without inventing re-inventing much because that is already available, a platform is available on that.

I would think that 10 percent of the total coal production if it is diverted to unregulated sectors, the power sector would be possibly in a strain because coal in India is largely meant for power sector and if you look at the incremental coal production over the last ten years, I think 100 percent of it, if not 95 percent has gone only to power sector. The power sector demand is huge, there is an unsatisfied demand as on date and that has to be met. So taking away 10 percent of the coal production for this purpose may not be very easy but keeping it as a part of 10 percent, which is put under e-auction even today, I think that could be a good idea. Maybe 10 could be increased to 15 percent and part of it could be given to the end users and part of it could be put under spot sales.

So that to my mind is a doable thing but more important thing as PC Parakh pointed out right at the beginning - is to increase production fast in the short-term because unless that happens, all these plans will not yield much because in any case the unregulated sector would - the default situation is to meet the requirement of the power sector first. So after meeting that whether coal is available then it goes to the unregulated sector and unless the production grows very fast - for which some indications are available - this year at least in the first 45 days 11 percent growth has taken place but much more has to happen in that area. So unless that happens, you will not get the coal to deliver in whatever manner we decide, it could be auction or whatever it is.