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Coalgate: Decoding the implications of SC order on coal block allocations

The Supreme Court of India today delivered a judgement which is likely to have far reaching consequences on the energy scenario in India. In a judgement the court said, "The allocation of coal blocks through Government dispensation route, however laudable the object may be, also is illegal since it is impermissible as per the scheme of the CMN Act (Coal Mines Nationalisation Act, 1973)."

This essentially deemed illegal, the 195 coal blocks that had been allocated to public sector and private sector companies since 1993. These coal blocks had geological reserves amounting to 44.8 billion tonnes.

The decision to give away coal blocks free to the private sector was first made in 1993. The idea, as the Economic Survey of 1994-1995 pointed out, was to “encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973, was amended with effect from June 9, 1993, for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector.”

The idea sounded “laudable” at least on paper but the trouble was that “no objective criteria for evaluation of comparative merits” of companies to which these coal blocks were allocated, was followed. As the Supreme Court judgement put it “The approach had been ad-hoc and casual. There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth. Common good and public interest have, thus, suffered heavily.”

Most of these coal blocks were allocated between 2004 and 2011 when the Congress led United Progressive Alliance (UPA) was in power. Data from the Provisional Coal Statistics for 2011-2012 points out that 156 of the 195 mines with geological reserves amounting to 41.24 billion tonnes of the total 44.8 billion tonnes, were allocated between 2004 and 2011. Hence, nearly 94% of the reserves were allocated between 2004 and 2011. Interestingly, Manmohan Singh was the minister of coal for a large part of this period between 2006 and 2009. During this period a little over 78% of the total 44.8 billion tonnes of coal reserves were allocated.

While the approach was adhoc, the move could have still benefited the country, if the companies to whom the blocks had been allocated had started producing coal quickly enough. Interestingly, during 2011-2012, these coal blocks produced 36.9 million tonnes. This amounted to around 6.8% of the total production of 539.94 million tonnes during the course of that year.

For the current financial year (i.e. 2014-2015) these mines are expected to produce around 52.93 million tonnes. This will be out of a total produce of around close to 590 million tonnes. The demand for this year is expected to be at 787 million tonnes.

Interestingly only 31 out of the 195 coal blocks currently produce coal. What this tells us is that most of the public sector and the private sector companies to which coal blocks were allocated haven't started producing coal as yet. A major part of these blocks as mentioned earlier were allocated between 2006 and 2009. Given that its been a while since these blocks were allocated, and hence its surprising to see that only 31 out of the 195 coal blocks are currently producing coal.

This tells us a lot about the ground level implementation challenges in India.

What remains to be seen is the impact this judgement will have. At close to 53 million tonnes in 2014-2015, the captive blocks will produce around 9% of the country's total coal production. It has to be ensured that this produce is not suddenly taken out of the equation because that can have disastrous consequences for the energy scenario in this country.

The Supreme Court also pointed out that “it is directed that the coal blocks allocated for ultra mega power project (UMPP) would only be used for UMPP.” Data shows the total amount of coal expected to be produced by UMPP in 2014-2015 stands at two million tonnes. Adjusting for this, the amount of coal being produced by coal blocks stands at 50.92 million tonnes (52.92 million tonnes – 2 million tonnes).

If this coal were to be imported, assuming a landing price of Rs 3400 per tonne of coal (if its imported from Indonesia) this would mean an additional expense of Rs 17,300 crore per year. In this scenario, power tariffs will go up further. This will in turn impact inflation and economic growth.

But it is not just about power tariffs. Our ports will have a tough time handling this additional quantity of coal that will have to be imported. Over and above that, the Indian Railways is not exactly geared to be able to transport this coal from the ports to different parts of the country where it is required. The added infrastructure that will be required to handle the additional imports cannot be created overnight. Further, it is likely to drive up international price of coal, which has been falling lately. Also, it needs to be decided as to what happens to those coal blocks were coal is actually being produced. Do they get away just by paying a fine?

By following an arbitrary process of allotment of coal mines the various governments of the past (primarily the Congress led UPA) have left a huge mess which threatens the energy security of India. The Supreme Court judgement points out that “the explanation by the Central Government for not adopting the competitive bidding is that coal is a natural resource used as a raw material in several basic industries like power generation, iron and steel and cement.”

It goes on to add that “The end products of these basic industries are, in turn, used as inputs in almost all manufacturing and infrastructure development industries. Therefore, the price of coal occupies a fundamental place in the growth of the economy and any increase in the input price would have a cascading effect. The auction of coal blocks could not have been possible when the power generation and, consequently, coal mining sectors were first opened up to private participants as the private sector needed to be encouraged at that time to come forward and invest. Allocation of coal blocks through competitive bidding in such a scenario would have been impractical and unrealistic.”

The Central Government referred to in the judgement is the Congress led UPA government. The moral of the story here is that when you don't allow the free market to operate, when things are not transparent, and when politicians decide on rules and framework as they go, the situation usually ends up in a mess.

The least that can be learnt from the Coalgate experience is that whenever the government decides to allocate natural resources from now on, it should do so in a transparent and rule based manner.

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