CAG COAL REPORT 2012
A MOUNTAIN OUT OF NOTHING
TAKING US FOR A ROYAL RIDE
By Anirban Roy, Advocate
I. Introduction
Currently we are experiencing a
huge uproar & outrage in India
over a “scam” popularly known as “Coal Gate” which has been supposedly exposed
by a Report filed by the Comptroller & Auditor General of India (CAG)
titled Performance Audit on Allocation of Coal Blocks and Augmentation of Coal
Production dated May 11, 2012 (Coal Report).
While I understand the
compulsions, political and otherwise, of many to outrage, I am quite saddened
to see the tendency of many to think from their heart and their lethargy to
form independent informed opinion.
In my considered opinion, the CAG
Coal Report, BY ITSELF & WITHOUT ANY FURTHER FACTS, is a “Mountain
out of Nothing” which is being further misused to take us for a “Royal
Ride”.
By the present write-up I
endeavour to present certain facts and views to enable those who haven’t read
the CAG Coal Report to form independent informed opinion. The write-up relies
solely on the facts stated in the CAG Coal Report and doesn’t travel beyond it
and analyses the Report on its own contents.
II. Relevant facts relating to
Private Coal Mining in India
1.
Coal Mines (Nationalisation) Act, 1973
nationalised all Coal Mines in India
and reserved Coal Mining for public sector only. Coal Mining began to be carried
out by Coal India Limited (CIL) and its subsidiaries.
2.
Coal (Nationalisation) Act, 1973 allows
allocation of Coal Mines to certain specified industries for mining, extraction
and captive consumption of Coal. Captive Consumption means extraction and
consumption of Coal for own consumption by these specified industries.
3.
The specified industries could either be in the
public sector or in the private sector.
4.
No commercial Coal Mining is allowed in India
i.e. pure extraction and sale is not allowed. Even in case of Captive Mining,
any excess Coal extracted beyond the need of the Captive Miner is required to
be sold to CIL at specified prices.
5.
Industries which are allowed Captive Mining are
primarily Iron & Steel (from 1976), Power (from 1993) & Cement (from
1996) i.e. all from the infrastructure sector.
6.
Captive Coal Mining by specified industries is
in keeping with the long term economic goals of the country. It is the
responsibility of the State to feed these industries which are in the
infrastructure sector with adequate Coal and in order to ensure that these
industries are not solely dependant on CIL for a critical raw material, they
are allowed to themselves mine their requirement. Thus Captive Coal Mining does not
result in any loss to the Nation. In fact it adds to its economic development.
7.
Coal import is allowed freely in India
under OGL. This is an alternate source of supply for those in the specified
industries who do not wish to buy Coal from CIL or go for Captive Mining.
8.
Mines & Minerals (Development &
Regulation) Act, 1957 (MMDR Act) specifies the royalty and dead rent payable by
any mine allotee including Coal Mines. Royalty is payable on the quantum of Coal
extracted and dead rent is payable on the area of the Coal Mine.
9.
Grant of Coal Mining Rights are accompanied by
conditions to be complied with after the grant. These include milestones for
Coal extraction & production. Allocations can be cancelled for
non-compliance with these conditions.
10.
From time to time, Ministry of Coal, in
consultation with CIL, identifies Coal Mines which are not part of the mining
plan of CIL and earmarks them for allocation for Captive Mining. Thereafter
applications are invited from the specified industries for grant of licenses
for Captive Mining.
11.
In 1992, an Inter-Ministerial Screening
Committee headed by Secretary Coal was formed for evaluation of applications for
Captive Mining Licenses. Allocation of Coal Mines was done by Ministry of Coal
on the recommendation of Screening Committee.
12.
Till 2004, there was no specific criteria for
allocation of Coal Mines. All that was required was a recommendation from the
State Government. The letter of recommendation had to merely state that the
proposed allottee was setting up a permitted end-use project.
13.
Till June 2004, 39 Coal Mines had been allotted
for Captive Mining. All of these allocations were made upon evaluation by the
Screening Committee.
14.
On June 28, 2004, UPA I Government made public
the concept of allocation of Captive Coal Mines through Competitive Bidding.
15.
In July 2004, Secretary Coal submitted a report which
was of the view that Captive Mine allotees make “windfall gains”. It is not
known atleast from the CAG Coal Report as to why it was so felt. It was however
felt that Competitive Bidding process could tap only a part of this “windfall
gains”. It was also felt that the present mechanism of evaluation by the
Screening Committee doesn’t ensure transparency and objectivity.
16.
In September 2004, the PMO pointed out
certain disadvantages of the Competitive Bidding Process. The view of the PMO
was opposed by Secretary Coal who expressed desirability of taking decisions in
respect of all pending applications on the basis of Competitive Bidding.
17.
In October 2004, the Ministry of Coal felt that
changing the policy and introducing Competitive Bidding would delay the process
of allocation. It also disagreed with the view that allocation by Screening
Committee doesn’t ensure transparency & objectivity.
18.
By that time, several applications had already
been received based on the current policy. It was felt that it would not be
appropriate to change policy at that stage for existing applications and that
new policy could be made prospective.
19.
Accordingly it was decided that the cut-off date
would be taken as June 28 2004 and the process completed by March 2005. It was
also decided that Competitive Bidding process would be introduced by the
legislative process of a Bill and not by way of any Ordinance.
20.
From July 2004 to September 2006, 71 Coal Blocks
were allocated for Captive Mining under the policy of evaluation by the
Screening Committee.
21.
There was further delay in the introduction
of Competitive Bidding process on account of opposition from the Power
Utilities to participate in the Competitive Bidding process as well as from the
State Governments where the proposed Coal Mines were located.
22.
In April 2006, in a meeting held at the PMO, it
was felt that the MMDR Act should be amended to introduce Competitive Bidding
uniformly for all minerals.
23.
Subsequently, Ministry of Coal felt that the
issue of amendment to the MMDR Act should be re-visited as it involved
withdrawing the current powers of the State Government which would have federal
polity implications.
24.
In May 2006, the matter was referred to the
Ministry of Law & Justice, Department of Legal Affairs for its views on the
legal feasibility of the proposed amendment to MMDR Act.
25.
In July 2006, Department of Legal Affairs
opined that it was open for the Government to introduce Competitive Bidding by
amending existing administrative instructions.
26.
In view of conflicting opinions, a reference was
once gain made to Department of Legal Affairs which, in August 2006, opined
that suitable measures be taken for amendment of the MMDR Act for addressing
the issue of Competitive Bidding.
27.
In the meantime, allocations of Coal Mines
continued to be made as per the policy of evaluation by the Screening Committee.
28.
In October 2008, a Bill to amend MMDR Act was
introduced in the Parliament. The same was referred to the Standing Committee
which submitted its Report in February 2009.
29.
In August 2010, amendment to MMDR Act was passed
by both Houses of Parliament. Section 11A was added to provide for Competitive
Bidding process in the allocation of Coal Mines. (Sec 11A of MMDR Act however does
not state as to how the Competitive Bidding process is to be effected).
30.
In February 2012, Auction by Competitive Bidding
of Coal Mines Rules, 2012 were notified. (These Rules also do not state
as to how the Competitive Bidding process is to be effected).
31.
Between 2006 and 2009, 38 Coal Mines have been
allocated for Captive Mining.
32.
As on date of the CAG Coal Report, 142 Coal
Mines were under Captive Mining. (The 3 figures of 39, 71 and 38 however add
upto 148).
33.
It is pertinent to note that 67 of the Coal Mine
Allotees out of the total of 142 ARE
GOVERNMENT COMPANIES and 75 are private parties.
34.
As on date of the CAG Coal Report, the total Geological
Reserve of coal in India
was around 2.85 Lakh Million Tonnes. The total Geological Reserves of the Coal
Mines held for Captive Mining was around 37 Thousand Million Tonnes.
35.
Several Captive Mine allotees had not commenced mining
and extraction as on date of the CAG Coal Report for various reasons such as
delay in environment clearance etc.. Several show cause notices have already
been issued to the allotees in this regard.
III. How did the CAG come into the
scene?
Following is a verbatim
reproduction of the Audit Objectives in the CAG Coal Report :
“Gap between demand and domestic supply of
coal is widening in the country and consequently imports are progressively
increasing. On the other hand there are instances where capacities in power
plants are either lying idle or facing
difficulties in augmentation in capacity for want of coal. In the backdrop of
these concerns, Performance Audit on Allocation of Coal Blocks and Augmentation
of Coal Production has been undertaken to obtain assurance that :
CIL augmented its production capacities as
planned.
Procedures followed for allocation of coal
blocks for captive mining ensured objectivity and transparency.
Coal blocks allocated for captive mining
augmented production of coal as envisaged.”
Comment 1:
It is debatable whether the
Constitutional and Statutory obligations of the CAG require him to undertake
such a study. Such a study is certainly not unconstitutional but seems totally
unwarranted as there are other institutions monitoring the parameters of Indian
economy. Further if the Office of the CAG begins to compare demand and supply in
respect of every item in the economy, the work of actual audit of Government
accounts might have to be outsourced to some other agency.
Comment 2:
Till 2009-2010, production of Coal
in India by CIL which
supplies more than 80% of coal in India was more than 90% of the
targets set internally and by the Planning Commission. So the situation was
quite under control and was certainly no cause for alarm for the CAG.
Comment 3:
Even if the gap between demand
and supply was widening, it is not understood as to how that warranted a study
into the policies and guidelines followed in “Allocation of Coal Blocks” unless
ultimately reaching there was the hidden objective. Bad allocation of Coal Mines does
not per se lead to bad Coal Mining.
Comment 4:
Rising imports do not result
directly from gap between demand and supply. Coal imports in India are freely allowed under OGL
and is a valid sourcing option for the industry. The decision to import is
determined by several factors including the quality of imported coal vis-à-vis
quality of local coal.
The above four comments are
intended to merely serve as food for further thoughts for the readers.
IV. CAG Findings
There is no controversy as
regards the findings and analysis of the CAG on the aspect of Coal production
in India
vis-à-vis its demand. Hence this write up restricts itself to the findings of
the CAG on the aspect of Coal allocation (which is the subject matter of
outrage in the country).
1.
The CAG did a test check of the documents
relating to three mines namely Fatehpur, Rampia & Dip side of Rampia. The
CAG could not find any comparative evaluation in the relevant papers.
Accordingly, on the basis of these 3 stray cases, the CAG concluded that the Screening
Committee (in existence since 1993) “does not follow a transparent method of
allocation”.
2.
The CAG was of the view that in the Xth Plan and
thereafter, the number of applicants increased as compared to the availability
of blocks. Accordingly, there was an urgent need to bring about a process of
selection that was “not only objective but also demonstrably transparent”. The CAG felt that allocation by Competitive Bidding
was one such acceptable selection process.
3.
The CAG felt that although the Government
decided to bring in transparency and objectivity in the allocation process with
June 28, 2004 as the cut off date, the process kept getting delayed.
Steps could have been taken to introduce Competitive Bidding in September
2004 itself so that next round of allotment after cut-off date could be
taken through Competitive Bidding. (Refer
Point II (16) )
4.
The CAG felt that Competitive Bidding process also
could have been introduced in July 2006 through administrative
instructions as per the opinion of the Department of Legal Affairs. (Refer Point II (25) ) Despite clear
advice by Department of Legal Affairs, there was prolonged legal examination of
the issue and the Government continued with old policy namely evaluation by the
Screening Committee for its allocations between 2006 and 2009.
5.
The CAG felt that delay in implementation of
Competitive Bidding process “rendered the existing process beneficial to a
large number of private companies”. The CAG did not explain why this is so.
However the CAG “attempted to estimate the financial impact of these benefits”.
For this
purpose, the CAG firstly estimated the Extractable Reserve of 57 Captive Mines
of the 75 private parties to whom Captive Mines were allocated. This was done
by applying a certain percentage to their Geological Reserve. This figure
possibly represents the quantum of Coal these 57 private parties could extract
from their Captive Mines over its life (say about 30 years).
Thereafter the
difference between the “average sales price of CIL” and the “average cost of
production plus financing cost of CIL” per Tonne was calculated.
The above
difference was applied to the Extractable Reserve to arrive at the “financial
gain” to the private parties quantified at the now famous figure of “1.86 Lakh Crores”.
While the CAG
did not explain what the figure of 1.86 Lakh Crore actually meant, he stated
that “PART
OF THIS FINANCIAL GAIN COULD HAVE BEEN TAPPED BY THE GOVERNMENT BY TAKING
TIMELY DECISION ON COMPETITIVE BIDDING”.
6.
The CAG observed that several parties to whom
Captive Mines had been allocated had not commenced extraction as this
contributed to the shortfall in supply.
7.
The CAG finally opined that “there is a need for
strict regulatory and monitoring mechanism to ensure that benefit of cheaper
coal is passed on to the consumers”.
V. What the CAG Coal Report does not
say
1.
It does not get into any discussion whatsoever
on the merits and demerits of the existing process vis-à-vis Competitive
Bidding. It concludes that the process of evaluation by Screening Committee is
bad based on his scrutiny of 3 stray cases (out of atleast 142 cases since
1993) and concludes that Competitive Bidding process is the best because it was
announced by the UPA Government itself.
2.
It does not say how a Competitive Bidding
process has to be effected.
3.
It does not say how a Competitive Bidding
process would give more revenues to the Government given that the rates of
royalty and dead rent are fixed by the MMDR Act.
4.
It does not quantify the additional revenues
that could have flown from the Competitive Bidding process.
5.
It quantifies the supposed “financial gains” to
the private parties as 1.86 Lakh Crores but does not even whisper that the same
is illegitimate or undue benefits.
6.
It does not say that the figure of 1.86 Lakh
Crores is a “Loss to the Exchequer”.
7.
It does not say that the allocations made
are bad in law or otherwise or that they require cancellation.
8.
It does not even whisper that there were any
extraneous considerations for the allocation.
VI. Comments on 1.86 Lakh Crores
The figure of 1.86 Lakh Crores is
“sensational”
but “senseless”.
As stated earlier, even the CAG
doesn’t consider it to be “Loss to the Exchequer”, notional or otherwise. It is
the estimated “financial gain” to be made by the private parties over the life
of the Captive Mines i.e. next 30 years.
Without even getting into the
fallacies of the methodologies adopted by the CAG to compute this figure, the
exercise itself was meaningless, futile and gross waste of time.
Allocation to private parties for
Captive Mining is perfectly legal and is done to reduce the burden on CIL and
for economic development of the country. An allottee would take a Captive Mine
only if he perceives it to be more beneficial as compared to purchasing Coal
from CIL or importing it. It is pure commerce. It would be naïve to even suggest
that such a benefit is illegitimate. Why indulge in a meaningless
exercise to estimate that?
The benefit that the allotees of
Captive Mines would get can be computed, if at all, by comparing its own cost
of production over the next 30 years with the price of CIL Coal for the next 30
years after considering the royalty and dead rent payable over the next 30
years. The CIL cost of production has no relevance. Further the comparison of
the CIL cost of production with the CIL sales price is meaningless as Captive
Mines CONSUME AND DO NOT SELL.
CAG has computed this senseless
figure of 1.86 Lakh Crore to merely say that part of this amount could be
tapped by the Government by Competitive Bidding. This is outright meaningless
as revenue
from Captive Mines solely depends on the royalties and dead rent specified in
the MMDR Act. Competitive Bidding by itself would not have even added a
Rupee.
VII. General Comments
1.
The procedure followed by Government in
allocating the Captive Mines was as per law and policy and there was no
illegality whatsoever in the allocation.
2.
Policy is the prerogative of the Executive
and that certainly includes scrapping of old policy and introduction of new
policy and the timings thereof. Even the Courts cannot interfere in policy
matters unless the same is arbitrary on the touchstone of Article 14 of the
Constitution. No such case is even whispered here.
3.
It is beyond comprehension as to how a Government
can be faulted for delaying the implementation of a policy which it itself
wanted to bring. The announcement of the concept of Competitive Bidding by the
Government did not place any obligation on the Government, legal or otherwise,
to implement the same or implement within a time frame.
4.
It is outright absurd to suggest that the
opinion of the Coal Secretary in September 2004 or the Department of Legal
Affairs in July 2006 had a binding effect on the Government.
5.
The revenues from the Captive Mines depends on
the rates of royalty and dead rent specified in the MMDR Act which are recoverable
from the allotees. There has been no “Loss to the Exchequer” by any
stretch of imagination.
6.
If the Captive Mines have not commenced
productions as per milestone conditions set at the time of allocation, the
allocations can be cancelled after following due process of law and after
giving them a hearing. There are several factors leading to delay in
extraction. Captive Mines are not like ready made water wells from which water
can be drawn from Day One. However cancellation of allocation for
non-fulfillment of a condition of allocation cannot be equated with bad
allocation and it does not make the allocation bad ab-initio.
VIII. Concluding comments on BJP
The BJP has been demanding the
resignation of the Prime Minister and cancellation of the allocations of
Captive Mines and has not allowed the Parliament to function since August 21,
2012. The legitimacy and the bonafides of their demands and actions can be judged
from whatever has been stated above.
Be that as it may, I have two simple
questions for BJP. Lets assume that it was not aware of how Captive Coal Mines
are allocated since 1993 despite being a national level political party and
despite being in Government from 1998 to 2004. However amendment to MMDR Act
for bringing Competitive Bidding was introduced in 2008, referred to the Select
Committee and passed in 2010. In these two years didn’t it occur to them
even once to enquire about the procedures followed till date for Captive Mine
allocation? Did it really wake up to reality after the CAG Coal Report
or is
it merely using the CAG Coal Report to take us for a ROYAL RIDE?
Anirban Roy
September
04, 2012
Email: anirban@royslawfirm.com
Twitter :
@AnirbanFromRLF
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