Q&A: Five things about India's coal scandal
- 4 September 2012
- From the section India
What are the coal blocks and why are they important?
India is one of the largest producers of coal in the world.
The coal-rich region in India includes huge swathes of eastern states like Orissa, Jharkhand and Chhattisgarh, and pockets in the central and southern parts of the country.
Large areas containing coal are divided into blocks, which can then be leased to mining companies.
More than half of India's commercial energy needs are met by coal. It is the main fuel for generating power and making steel and cement.
The state-owned Coal India Limited (CIL) is the only agency which sells coal in India. It is also the world's largest producer of coal - during 2011-12, it produced more than 435 million tonnes of coal.
How were the coalfields allotted?
Coal mining in India was taken over by the government in 1973.
However, in 1976, the government allowed private producers of iron and steel to own coal mines for their own use. Power and other companies were also allowed to own their own coal mines from 1993.
Between 1993 and 2005, 41 licences to operate such mines were allocated to private companies and 29 to government-owned ones.
In 2003, the BJP-led government announced the "Power to all by 2012" mission, whose target was to add an extra 100,000 MW of generating capacity to India's grid by 2012.
When the Congress-led government came to power in 2004, it realised that CIL would not be able to produce enough coal to meet the requirements of the planned new thermal power plants.
So, the government decided to allot more mines to both private and state-owned players, to help them generate power for their own use.
Between 2006 and 2009, licences for a further 75 coal blocks were allotted to private firms and 70 to government companies.
What went wrong with the allocations?
The ministry of coal, headed at the time by Prime Minister Manmohan Singh, gave away licences for captive blocks to state-owned and private companies through a screening committee set up in 1992.
The criteria for allocating these licences were modified three times - in 2005, 2006 and 2008.
The independent Comptroller and Auditor General of India (CAG) has said the guidelines for leasing out coal blocks were non-transparent.
The CAG felt the prevailing guidelines allowed a "windfall gain" to the company which had been allotted a coal block for its own use as there was a "substantial difference" between the high market price of coal - sold by CIL or imported - and the lower cost of coal produced by a so-called "captive" block.
What it meant was that a company mined its own coal paid less for the coal than a company which bought it on the open market.
The controversy began when the CAG said in a report in August 2012 that the country had lost $33bn (£20bn) by allotting coalfields cheaply.
The CAG felt that "the process of bringing in transparency and objectivity in the allocation process of coal blocks... got delayed at various stages".
"This led to a financial benefit of 1.86 trillion rupees [$33bn; £20bn] to the private players."
Was the government's method flawed?
The auditors say coalfields were allotted in a non-transparent manner.
The report added that there was no information on how the various applications for specific coal blocks had been evaluated and finalised by the government.
This was despite the fact that some blocks had attracted several dozen interested buyers.
In the case of one block, only two of the 108 applicants agreed to give detailed presentations to the screening committee. However, the latter recommended six names.
Media reports suggest that ministers and chief ministers of various coal-rich states successfully lobbied for blocks to be allotted to specific private companies.
A few private firms won licences for coalfields which contained more coal than was needed for generating their own power.
Several private firms are also alleged to have illegally sold coal meant for their own use on the open market.
Most importantly, the auditor observed that the objective behind the allocations - to boost coal production to meet the demand from new power plants - had not been met. Many firms simply "squatted" on their blocks.
Of the 86 coal blocks which were to produce coal by 2010-11, "only 28 blocks (including 15 allocated to the private sector) started production as of 31 March, 2011".
Their combined production during the year was less than half of the target set by the government.
The current minister of coal maintains that delays in mining may not be deliberate; they can occur if the miner does not get several statutory clearances required to start production.
In February 2012, the government told the auditor that "the development of coal blocks involves a gestation period of three to seven years for reaching the production stage".
Is auction a fairer way?
In 2004, the government first mooted the idea of auctioning coal blocks to companies needing fuel for their own use.
But over the next few years, an attempt to move towards auctioning coalfields hit an obstacle.
Power generating companies feared an increase in the price of coal, and chief ministers of some states felt that their role in recommending licences to sell coalfields in their states would diminish.
In October 2008, however, a new bill to auction coal blocks was introduced in parliament. It became law in September 2010.
The government defended the delay in passing the bill, saying that the policy-making process can take several years in a coalition government, as is evident from similar delays to allow foreign direct investment in multi-brand retail.
The government also pointed out that opposition to the coal auction came from opposition-ruled states.
There is another factor at play here - auctions can result in higher prices for the consumer.
So, while they enable the government to maximise its revenues through the sale/lease of natural resources, they can hurt the consumer.
Competitive bidding - where bids are sealed and submitted by interested parties and opened in front of everyone - is a more sensible process as it does not include multiple bidding.
However, it can be manipulated by both the bidders and policy makers.
Therefore, what is required is a transparent process, which is known to all and where evaluation parameters are set (and not changed midway).
Most importantly, information about the policy and process should be available to the public, and not be shrouded in secrecy.