Demystifying Coalgate

In 1973 Prime Minister Indira Gandhi in her ‘Nationalise the World’ plans nationalises coal production in India. In 1976 however some leeway was made in the policy to allow specifically iron & steel companies to have captive coal mines that they could mine themselves and then use in production of iron and steel. Changes came in 1992-93. The government allowed captive coal mines for power generation and other special uses. A screening committee was set up to screen applications for captive coal mines. This only meant you could mine coal for use in production/power generation. Sale of the coal was still not allowed. Till 2004 if private players had to make applications for captive coal mines they needed to get letters of recommendation from their respective state government and prove end use of the coal.

Coal India Limited (CIL) is the Maharatna PSU that mines about 81 per cent of all coal in the country. It has seven subsidiaries. CIL was incorporated in 1975 when the nationalisation happened.

The Original Decision

In 2003 the Vajpayee government announced a mission “Power for all by 2012”. Hence the Planning Commission decided that the demand for coal would increase significantly in the tenth and eleventh plan period (2002-12). As a result they increased their targets of coal production for these two plans.

In May 2004 the Vajpayee government. fell and UPA I assumed power.

The Energy Coordination Committee (PM + Ministers of Finance, Power, Petroleum, Planning Commission members, formed in 2005) decided in Feb 2006 that CIL should relinquish hold of those coal blocks that they were not likely to start production in till 2012. These blocks then would be allotted to private players to mine in order to increase production of coal. This mined coal then could be sold to CIL at the notified government price. Note this was a change at this point. Before this policy decision, while captive mines could be allotted, the mined coal could not be sold, but only used in production. In May 2006 accordingly CIL/Ministry of Coal de-reserved 48 such coal blocks.

I don’t see any wrongdoing or issue in the above decisions. The government needed to boost mining of coal, hence found mines that CIL wouldn’t use for a long time and decided to allot them to private players. Note that this was government policy hence the CAG has no mandate to question the policy of the government The CAG accordingly did no such thing in the report.

However things get iffy very soon.

Screening Committee

The CAG has described how the Screening Committee operated. Basically applications were made, then the Screening Committee shortlisted a few to make a presentation and then a selection was made.

Firstly, it must be noted that the applicants for captive mines skyrocketed. For example Fatehpur mines attracted 69, Rampia 67 and Rampia dip side 41 applicants. This is one of the main reasons why competitive bidding was desirable. The situations had changed. The number of applicants were high and the Screening Committee: was being pushed and pulled by external pressures.

Some funny stuff from the Screening Committee: In the Rampia and Rampia dip side out of a total of 108 applicants (67+41) only 2 applicants were shortlisted to make presentations. Eventually, however, six companies were allotted the coal blocks. Also the meeting minutes did not have anything on the applicant evaluation. No comparative criteria on how the decision was taken.

Ministerial Games

The Secretary of Coal (P.C. Parakh) in June 2004 (who sort of emerges as a hero of the whole conundrum) pushed for competitive bidding as early as 2004. He clearly stated that the allocation of captive coal blocks to private players would mean a financial windfall. He advised that the government tap part of this windfall for public uses. The Secretary was also very clear that the scenario had changed and the current allocation system would not be transparent or objective. The PMO and the Minister of Coal however opposed him. They brought up several issues (that the Secretary didn’t consider to have any merit) and disagreed that the Screening Committee approach couldn’t have worked.

The Ministry of Coal also opposed him saying that bringing competitive bidding would take too long since the “Coal Mines Nationalisation (Amendment) Act” which was in Rajya Sabha since 2000 needed to be amended and there were too many pending applications. This objection is especially funny considering the government in general took such long times themselves to make any decision (try the last para of this section). The Secretary suggested an ordinance to impose it but the PMO replied saying that the correct way to do it was to amend the Act, so don’t need an ordinance for now. They decided that the amendment would be brought in the next Parliament session. This was in November 2004.

However in July 2005, at a meeting at the PMO it was stated that the amendment was taking too long and they would go ahead and allot more mines according to the old policy. Secretary of Coal again stated that competitive bidding would only tap part of windfall profit. But in August 2005 PMO asked Ministry to go ahead on an urgent basis to allot coal blocks.

The Department of Legal Affairs was consulted in 2004 on how competitive bidding was introducible and in 2006 the DLA after a lot of discussions offered that they could start it in 2006 by changing some administration instructions (without amendment to the Act). So the competitive bidding could’ve started in 2006. But it did not!

In April 2006 a PMO meeting decided that it might be better to amend MMDR Act rather to make competitive bidding across all minerals and not just coal. They sent a note to the Ministry of Mines. The amended Act finally became law in 2010 and the rules for competitive bidding were notified in 2012! Only eight short years since the whole conundrum started.

The CAG noted that this process to introduce competitive bidding was delayed several times and it almost seems as if there was a reluctance to start it. Wrongdoing? Maybe. Horrendous governance? Hell yeah!

How did they do?

So the government basically allotted 64 blocks to private parties out of a total of 216 blocks allotted (some to power projects and some to other government companies) to increase the coal production. How did they perform? In a word: Pathetic!

As of 2010-11 only a quarter of the coal blocks expecting to be producing had begun. The total shortfall from targets of the Planning Commission in coal mined was a grand 52.55 per cent. Suffice to say that the coal production increase royally failed.

In fact, the government actually de-allocated 25 blocks because the companies who were allotted didn’t seem serious in mining coal from them! To avoid such scenarios the government had taken bank guarantees from these companies that could be encashed if they weren’t serious about mining. But the bank guarantee system was so messed up that the CAG estimates that about Rs. 311 crore that were due to the government in bank guarantees have lapsed.

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 JAYASWAL NECO UNDER THE SCANNER

Coalgate Probe Shall Also Cover Iron Ore, Steel And Power Sectors

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As details of ‘more wrongdoings’ are coming to surface it is becoming apparent that ‘the coal block allocation process was twisted and manipulated’ to suit a few close to seat of power. CBI has raided the premises of leading companies who were allocated coal blocks after public hue and cry literally forced the government to take steps. BJP is sticking to its demand for cancellation of the 142 coal blocks allocated during the UPA rule and has targeted Coal Minister Sriprakash Jaiswal alleging that eight of his relatives are among the beneficiaries of the 34 coal blocks which were allotted since he took charge of the ministry. CBI has also raided the premises of Abhijeet Group, whose promoters the Jaiswals are said to have relations with the Coal Minister Sriprakash Jaiswal, something that the Minister denies vehemently.

The Abhijeet Group’s promoters may or may not be related to the Coal Minister, what is apparent is that they had the support and backing of some very important people in the power corridors of governance. There is no denying the fact that their contacts span the likes of Sonia Gandhi (UPA Chairperson), Farooq Abdullah, Salman Khurshid, Jyotiraditya Scindia, Montek Singh Ahluwalia, Murli Manohar Joshi (BJP), Prithviraj Chavan (CM, Maharashtra), Raja Sanjay Singh, Rajeev Shukla, Sheila Dikshit (CM, Delhi), Madhu Koda (CM, Jharkhand) and several top politicians. The present and past Presidents of India Pranab Mukherjee and Pratibha Patil and the Vice President Hamid Ansari have all either graced their programmes or felicitated the promoters of Abhijeet Group. Not just this, RNI has learnt from reliable sources that Abhijeet Group and its sister companies have been blessed and supported in the past by those in power, despite some blatant wrongdoings. Due to their huge investment recently made in the field of power and steel, the probe against them shall also include allotments of iron ore and power projects, as well as the projects concerning development of highways and collecting toll tax, few other areas in which the group has made significant inroads.

Abhijeet Group owned by Manoj Jayaswal has registered and corporate head office at Nagpur. Manoj Jaiswal, a close associate of Vijay Darda who was one of the promoters of JLD Yavatmal Energy, was allocated mines in Jharkhand, Chhattisgarh and Maharashtra and Dardas were his business partners. In an interview published recently, the Chairman of Jayaswal Neco, who happens to be father of Manoj Jayaswal, has claimed that the company that started with ‘zero’ rupee in pocket has been taken by the sons to a business worth Rs. 25,000 crore. This whopping rise in fortunes does not include the assets of other companies including Abhijeet Group. Jayaswal Neco too has its registered office at Nagpur. This is to be recalled that in as recently as June 2010, Jayaswal Neco board had approved demerger of steel biz of Corporate Ispat Alloys Ltd. (CIAL) (a subsidiary of Abhijeet Group) with self. It issued three shares of company to every two of CIAL.

Earlier this year, the Chhatisgarh government had filed a writ petition in the Delhi High Court against the central government over Jayaswal Neco Ltd’s applications for mining leases in a case that threw light on the murky world of mining in India. The state had alleged that the mid-sized steel-maker forged documents in its applications to get iron-ore mining leases in Rowghat in Bastar district in Chhattisgarh and that the Union government directed it to consider the application favourably even after the state showed investigative reports that said Jayaswal Neco had allegedly faked paperwork to show it had conducted prospecting (preliminary exploration) in Rowghat when it had actually not done so. It is to be stated that the iron ore reserves in Rowghat are said to be around 28,000 crore tonnes, valued at Rs 80,000 crore.

The CBI had filed an FIR against Jayaswal Neco, charging it with committing forgery and fraud to acquire mining leases in Rowghat. At that time, the CBI official had stated publicly that ‘besides the private company, some officials of the Union ministry of mines were also under the scanner’.

According to CBI sources, Jayaswal Neco had received four prospecting licences (PLs) for an area of 1,601.47 hectares in and around Rowghat iron ore deposits A, B, C, D and E of then undivided Madhya Pradesh in 1999. In 2000, the company made an application to the Chhattisgarh government, seeking mining leases (MLs) in the same area claiming preferential rights under the Mines and Minerals Development and Regulation Act.

The ML applications remained pending for almost seven years. In 2007, the Chhattisgarh government rejected Jayaswal Neco’s applications, claiming that the company didn’t submit any statutory prospecting report that was necessary for consideration of the mining lease application.

The Chhattisgarh government requested the CBI to take up the probe after Jayaswal Neco produced prospecting reports during later proceedings. It reportedly became suspicious after noting that the reports apparently created in May 2000 contained references to the ‘Chhattisgarh government’ and ‘Chhattisgarh forest department’ when the actual state was formed only six months later in November 2000.

Besides this, the acknowledgment letter issued by the Office of the Regional Controller, Indian Bureau of Mines, was also suspected to be forged. The case got buried in files until the flashlights were redirected towards the company after coalgate scam.

Stating on the events, the legal adviser to Jayaswal Neco had then commented: “The CBI FIR has been filed on the basis of vigilance probe conducted by the Ministry of Mines, but the probe was nullified by the Central Vigilance Commission. We have moved the Delhi High Court for quashing the CBI FIR. At a later stage, we also intend to move for launching malicious prosecution against the company in this matter.”

In recent times, CIAL has signed an MoU with the Jharkhand government for setting up 2.5 mtpa integrated steel plant at Seraikela-Kharsawan district. Meanwhile, Corporate Power Ltd. (CPL), another flagship company of Abhijeet Group, is setting up a 1215 MW power plant at Balunath (Latehar district), through an MoU with state government. Maharashtra Chief Minister Vilasrao Deshmukh okayed sanctioning of 100 MW power plant by Maharashtra Airport Development Company (MADC) for MIHAN SEZ to Abhijeet Group. The company also announced plans for setting up 1215 MW power plant in Yawatmal district under the banner of Jawaharlal Darda Yawatmal Energy Ltd. In relation to sanctioning of 1200 MW proposed power project at Chandwa, Abhishek Jayaswal (Director, Abhijeet Group) met Jharkhand CM Madhu Koda recently. Commenting on the venture, he said to media persons: “After allotment of coal blocks in our kitty, the group has increased its activities in other areas (iron ore, steel and power).”

When Afghanistan’s mining ministry opened the bids for the estimated 1.8 billion metric tonnes of ore at Hajigak, 100 kilometers west of Kabul, Steel Authority of India Ltd. (SAIL) and NMDC Ltd. (NMDC) offered a bid as part of an effort by Prime Minister Manmohan Singh’s government for a bigger role in a nearby country whose stability it called essential. Interestingly, while the Indian group included state-owned Rashtriya Ispat Nigam Ltd. and private-sector companies JSW Steel Ltd. (JSTL), Jindal Steel & Power Ltd. (JSP), Monnet Ispat Ltd. and JSW Ispat Steel Ltd., the Abhijeet Group company ‘Corporate Ispat Alloys Ltd.’ decided to bid separately for one of the four blocks. As per US government’s estimates Hajigak holds $1 trillion in untapped minerals.

Upon receiving the news of bid opening, SAIL Chairman Mr CS Verma had said: “This is the first time that Indian public and private sector companies have come together to jointly bid for an iron ore asset abroad. With Afghanistan holding strategic interest for India, we hope that our endeavour to obtain mining licenses there will be a stepping stone towards the larger objective of contributing to the much-needed economic growth of the country. This will pave the way for more such collaborative efforts in the future by Indian companies for obtaining raw material assets in other countries.”

“If we become successful for this bid, it will set the stage for large cooperative efforts between the public and private sector steel companies in times to come in other sectors as well, such as coal.” All these developments go on to convey that other areas beyond coal too needs to be investigated. (RNI News Network)

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The Math

Here is the section that everyone is really interested. Is the loss to the exchequer 1.86 lakh crore, If not, what is it?

Firstly, nowhere has the CAG mentioned that the loss to the exchequer is 1.86 lakh crore. This figure is basically the windfall gain that the private parties could have achieved. All of the parties who recommended competitive bidding always recommended tapping a part of the windfall gain. If my coal block cost me 100 per cent of my gains, why would I ever bid? What then is that number? Would I pay 50 per cent? Or would it be 30 per cent? Say if the government instead had started a profit share what would the share of the government be?

The Current Numbers

What is that figure 1.86 lakh crore comprised of? Here are the rules they used at high level:

1. How much did the companies pay for allotment of the mines?

      ■       Next to nothing. Phokat mein practically!

2. Only OpenCast mines (Easier to mine vs underground mines) were considered

      ■       Out of 75 totally private blocks only 57 blocks were used. This does underestimate the impact a bit.

3. Only coal blocks allotted to purely private parties were used (No Joint Ventures with government companies)
4. Average CIL’s cost of production per tonne of coal as of 2010-11. Rs. 583.01 was considered
5. Financing cost of Rs. 150 per tonne of coal was considered.
6. The total tappable reserve of coal in that coal block was considered.

      ■       Point of contention: This is like assuming all coal was extracted in 2010-11 and sold.

7. For sales they used the average sale price of all grades as of 2010-11.

      ■       Point of contention: Sale price of coal varied over the years. But cost of production would also have varied over the years. Can we assume that the profit per tonne remained at around Rs. 295.41?

8. That gives a financial gain of Rs. 295.41 per tonne of coal.

      ■       Makes the gross margin about 30 per cent (Not an outlandish number).

      The total tappable reserve was 6,282.5 million tonnes of coal. That number times Rs. 295.41 gives Rs. 1,85,591 crore

Other calculations

Many believe that the Rs. 1.85L Cr number is overstated. Maybe, I don’t know. What then is the real number?

 

Discounted over 20 years

What if instead of assuming that all of the coal was extracted in 2010-11, we assumed it was extracted over a 20-year period. Let’s use the same profit per cent but use a time value of money discounting at say 12 per cent as Swaminomics suggests.

That means the private parties would sell about 315.125 million tonnes of coal for 20 years earning Rs. 9,279 crore each year. That comes down to net present value of Rs. 69,313 crore.

There are a host of other calculations you could do, by ramping up to full production capacity for the first five years and then continuing at full for the rest of the time. Also is 20 years a good time frame to exhaust a block? If we knew the average production for CIL per block per year as a ratio of the total reserve, we could calculate the total exhaustion time frame. That might give a better estimate.

There is a great dialogue in Entrapment where Sir Sean Connery asks Zeta Jones:

What can you do with seven billion dollars that you can’t do with four?

Does it matter whether it’s 1.86L crore or it’s 69K crore or 6.9K crore? The loss is what matters.

Unwinding the Spin

In the defence against this report several spin tactics have been used by the government and the media. Let’s unwind some of those.

Same policy as before just continued what BJP started

The BJP didn’t start squat! The only hand the Vajpayee government played here was to announce a mission of power to all by 2012. Allotment was by screening committee since 1993. But UPA I changed the end use of the coal to include sale of coal to CIL. That’s what brought the windfall. Plus what sort of a government doesn’t see the sharp rise in applicants and manoeuvre accordingly? A bad one!

Throw all the hamaam mein sab nange jibes, nothings gonna stick!

We wouldn’t have 6 per cent growth without this

Well, the captive blocks that were allotted had pathetic production performance. A shortfall of 55 per cent in 2010-11. They did not meet their targets. How then are we saying that these allotments helped us achieve 6 per cent growth?

CIL failed to meet demand hence private blocks had to be allotted

CIL achieved all the targets that it was set all the way up to 2008-09 period. This is the point at which they started being unable to meet the demand. These blocks were allotted in 2005-06. Did they predict that CIL would not meet demand three years in advance?

Additionally, CIL, when they saw that they might not meet the targets, started the ‘Emergency Production Plan’ to boost production. They requested to be reallotted 138 blocks to boost production in August 2008. The Ministry did not respond. In September 2011, they revised that number and requested 116 blocks to be allotted. The Ministry is yet to respond. Is it then fair to assume that CIL’s shortfall in production has to be related to the Ministry’s inability to take decisions?

Conclusion

Was there wrongdoing? I’m not sure. Was it bad policy on top of good intentions? Maybe. But in the world of public policy, intentions are worth diddlysquat! Results matter. And the clear and final result is that the government failed to meet the country’s coal needs while in tandem handing over some very expensive resources to private players! How are we to know that next year the government won’t begin an open market for coal (where the price is anywhere between 55 and 80 per cent higher than the notified price) and hand a grand prize to these private players.

I’m not a socialist by any measure, but crony capitalism bugs me. (Centre Right India)

 By Sujeeth Pillai