Nitin Sethi & Ishan Bakshi  |  New Delhi 

April 21, 2015 Last Updated at 00:38 IST

The Narendra Modi-led National Democratic Alliance (NDA) government has made much of its claim that state governments stand to make windfall gains, upwards of Rs 2 lakh crore, from auction of coal blocks – more than the loss to the exchequer, as estimated by the Comptroller and Auditor General (CAG), because of random allocation of blocks by the previous government.

Clearly, an auction will generate larger sums than the allocations did during the United Progressive Alliance (UPA) regime, when states got only the royalties. But the government’s claims over the auction proceeds do not seem to stand the test of a closer scrutiny.

Only when all auctioned blocks actually begin to produce in full steam, in line with existing mining plans, will coal-bearing states make an annual Rs 6,284 crore from the auction, shows a Business Standard analysis of government data. Over the lifetime of the mining plan for the auctioned blocks or over 30 years, whichever is lower, states stand to earn Rs 1.77 lakh crore. This is perhaps why the government has always claimed in its official communications that it is ‘potential revenue’ for states from auctions, and not ‘revenue’.

Once mining begins, state governments will also make additional sums from royalty. But this amount from operating mines accrued earlier too, as rates are governed by regulations existing previously. This royalty will accrue to states in future regardless of whether the Centre takes the auction or the allocation route for coal blocks.

When requested, the coal ministry did not share the background calculations on how it reached the figure upwards of Rs 2 lakh crore but said the basis to calculate it was available publicly.

The NDA government has also tried to score a political point or two over the UPA government by claiming the revenue from the auction surpasses the Rs 1.86-lakh-crore loss to the exchequer estimated by CAG in its 2012 report on coal allocations under the UPA regime.

However, the analysis shows CAG never estimated what revenue the absolute sale of these coal blocks could secure – something that an auction achieves. It simply calculated how much profit Ltd could have made if it had sold the extractable reserves from the coal mines at a fixed rate of Rs 1,028.42 a tonne; it had taken Rs 733.01 as the cost of mining for CIL.

In other words, it assumed CIL made a profit of Rs 295.41 for every tonne of coal it sold. So, for the total extractable reserves of 6,282 million tonnes, CAG arrived at a profit forgone figure of Rs 1.86 lakh crore. Also, this computation was for merely 57 mines, and not the 200-odd that were cancelled after a Supreme Court order and eventually put up for auction or distribution by the NDA government. The government has so far auctioned 33 blocks.

Even when calculating the net profit CIL could have earned from mining coal and selling it to industry at a fixed price, CAG had originally estimated the amount to be Rs 10.67 lakh crore for 142 blocks. But this figure dropped to Rs 1.86 lakh crore once the auditor decided not to scrutinise all coal blocks allocated to public-sector companies or involving underground mining.

In a written response, the coal ministry, however, defended the government’s comparison between its auctions and CAG estimations. It said: “The CAG report is not based on net profit that could have accrued to CIL, but on cost and revenue of CIL for the particular grade of coal to calculate the loss to the exchequer. There is no difference between the two as the mines were allotted for 30-year lease periods earlier, too. Even now they have been auctioned for a lease period of 30 years.”

The revenue generated from a straight sale of coal assets is, naturally, going to be higher than the profit a government company will make by mining coal itself and selling it at an artificially determined low price. In fact, if private companies were now allowed to sell coal in free market, they would reap a greater profit than the CAG estimates, because their mining costs are considerably less than CIL’s.

In the current auction, monies to state governments will accrue from two income streams – royalty at 14 per cent of the comparable Coal India grade price and the per-tonne price quoted in the winning bid. States were anyway collecting royalty for all operating mines.

How much this royalty sum annually adds up to cannot be determined by the data the government has put in public domain. Coal can be of a varying quality even in a single block. It is graded according to the quality, and the benchmark CIL price for each sub-grade is different. But the government has not shared information on the proportion of different sub-grades of coal available in each seam of the auctioned blocks. Without this information, it is not possible to verify the government’s claims on the royalty that will accrue to states once the mining begins.

But the coal ministry replied “seam-wise grades, etc are all available in public domain”, on the MSTC website. In total, the ministry has claimed that the revenue accruing to states from the auction is going to be upwards of Rs 2 lakh crore.

Again, as experts point out, companies could ask for a change in the mining plan – in other words, how much they can mine each year under their mining licence. This will alter the revenues generated for states annually. Additionally, starting new mines from scratch can take more than two years if a company is keen to start. The mines already partially mined are likely to take off earlier, with others coming on stream over time.

The other figure being bandied about is that the two rounds of to private companies will see power rates coming down, lowering the total amount consumers pay by Rs 96,971 crore.

Power projects were asked to bid for coal blocks through a reverse-auction method. In other words, they had to say how lower than the relevant Coal India price they would charge for coal. This difference in mining costs is to be passed on to consumers when state electricity regulators recalculate the rate at which these power producers sell their electricity. The government estimated the savings to consumers at Rs 96,971 crore.

In the bidding for all blocks reserved for the power sector, the winning companies promised to forego their mining costs which would help bring the tariffs down. They also promised to pay additional premium to states for coal.

According to Icra, “since power generation projects of the winning bidders already have power-purchase agreements with distribution utilities mainly in Madhya Pradesh, Chhattisgarh, West Bengal and Odisha, the average tariff relief is estimated at about 0.9 per cent for consumers in these four states by 2016-17.”

But as noted, these figures do not take into account “the ability of the bidder (who is yet to tie up capacity) to quote a higher fixed capacity charge to cover the under-recovery in fuel cost in a competitive bidding process”. Further, additional costs incurred on account of activities like crushing, loading and washing can be passed on. This will reduce the impact of these negative bids on the reduction in power rates. But the extent to which the winning bidders are able to pass on these costs remains to be seen. The power producers are questioning the government for clarity on this already. As a result, the amount that consumers will save from the auction of coal to power companies remains open to debate, and it is impossible to nail it down to the specific figure the NDA government has gone to town with.

The fuzzy points about the revenue states will earn from coal auction
  • States will get revenue over a 30-year lease period based on mining plans. States get about Rs 6,200 crore annually only when all 33 blocks start producing to the limit
  • States always got royalty from operating mines. That does not change
  • Miners can get their mining plans revised, which will change the revenue states get annually
  • Revenue figures from sale of coal blocks cannot be compared with CAG report, which looked at profit CIL could have made from selling coal from only 57 blocks
  • Draft CAG report had put forgone profits at Rs 10.67 lakh crore for 142 blocks
  • Benefits to consumers from power companies will depend on how they renegotiate tariffs and not clear at the moment