Coal Scam: The CAG report is likely to leave PMO squirming

Forget the figure. Like the Rs 1,76,000 crore presumptive spectrum loss figure, the Comptroller and Auditor General’s (CAG’s) computation of Rs 10,67,000 crore of “undue gains” to companies awarded coal blocks during 2004-09 is an optical illusion.

Reason: calculating a “loss” or “undue gain” when no one knows its real cost (most of the coal is still to be mined) or sale price is merely a number pulled out of a hat based on assumptions and conjectures.

However, there is no gainsaying that this “scam” will have major political implications since its roots go to the PM and PMO. No matter what the final CAG report says on the coal scam, the PM is a wounded duck because this time he is directly in the line of fire.

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[caption id=“attachment_253535” align=“alignleft” width=“380” caption=“Comptroller and Auditor General of India Vinod Rai. AFP”]  [/caption]

Why? Because Manmohan Singh was, as Business Standard notes, “himself at the helm of affairs in the ministry for roughly two years when the majority of the blocks were allocated.”

Moreover, the real controversial decisions on coal are being taken right now by the PM and/or his Principal Secretary Pulok Chatterjee due to the looming coal-cum-power crisis - where, too, “undue gains” are likely to accrue to private parties. Of which, more later.

This could be one reason why the CAG was very quick to distance itself from the leaked “coal scam” report, which can be politically damaging to the PM. Jeff Glekin comments in Reuters Breakingviews: “The government needs this saga like a hole in the head. A mid-term election is still unlikely, because neither the opposition parties nor the Congress Party’s coalition partners are ready to push the knife in. But this fiasco further weakens Singh and suggests two more years of policy paralysis are now likely.”

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Let us first get the optical illusions out of the way before we delve deeper into the PMO’s role in the coal controversy.

While the Rs 10.67 lakh crore figure is a figment of the CAG's vivid imagination - assuming its sticks to this number in its final report - it does not mean there was no scam in the allotment of 155 coal acreages to around 100 private and public sector companies in 2004-09. But the scam isn’t in the “undue gain” figures.

Why? Because the purpose of the allotment of coal blocks was not to allow the companies to mine coal for direct profit, but to use the coal to generate cheap power. So, even if technically the coal was given away free, the gain would only partially accrue to the mine owners. The bulk of the “undue gains” would have gone to the power distribution companies (mostly state owned) and power consumers.

In fact, this is probably why the CAG - in a clarification issued after the leak of the draft report - went out of its way to say that its talks with the coal ministry “changed our thinking” and it is no longer claiming that “the unintended benefit to the allocatee is an equivalent loss to the exchequer.”

If the scam is not in the loss to the exchequer, where is it? A BusinessLine report on Friday offers a clue. An analysis by the newspaper’s energy writer says the coal block allotment process during 2004-09 was handled by a screening committee presided over by the coal secretary, but “all was far from well in this highly subjective selection process.”

The need for complete transparency was abandoned due to a looming crisis in coal production, but the states were obviously seduced into it by giving them the right to nominate their own stakeholders in these coal blocks. So if the process was flawed, there is little doubt that the states were partners in this crime.

Moreover, there is a good chance that the allocation of coal blocks brought in practices similar to those involving Unitech and Swan Telecom in the 2G scam - where foreign stakeholders were roped in for huge premia in the name of stake dilution even before the licence holders had begun to invest and roll out mobile services.

In the coal block case, BusinessLine says that “a host of fly-by-night operators used the process to make easy money. Once allotted a coal asset, they sold their ‘project plan’ at a premium. An upcoming private power project in a western Indian location has followed this route. The price of the asset was pocketed by the original beneficiary and the country will now pay a higher price for electricity than envisaged.”

So, there is clearly some scam here, but the CAG - assuming it has not probed this angle - will surely have to look under the rocks to find the worms.

However, “undue gains” are being offered right now under the nose of the PM, as his Principal Secretary now heads the high-powered committee to bail out new private power producers. A key concern he has been addressing is the pricing and availability of coal from Coal India - the public sector behemoth that has a monopoly on coal mining and sales, excluding coal blocks given for captive consumption.

The PMO dispensation has taken two arbitrary decisions - forcing Coal India to roll back coal price increases, and directing it to enter into 20-year fuel supply agreements with private power producers - which will effectively force the government-owned company to subsidise coal for private companies. (Read more about that here and here).

This point is well-documented since a private hedge fund from UK - The Children’s Investment Fund (TCI), which holds about 1 percent in Coal India Ltd (CIL) - has threatened to sue the company for failing to protect the interests of minority shareholders under pressure from the PMO (Read Firstpost report on that here )

According to The Times of India, TCI partner Oscar Veldhuijzen has written to CIL board members alleging that the company had cut prices on the direction of a top coal ministry official. The newspaper commented that this was tantamount to “CIL subsidising private power producers at the cost of its shareholders.” The report also noted that “CIL acted at the behest of the Prime Minister’s Office (PMO) to sign fuel supply agreements with power producers which could turn out to be a loss-making proposition for CIL.”

Quoting directly from the TCI letter, the report said: “Clearly, this has been done at the behest of power companies - at the sole cost of CIL.”

What is clear is that the PM or the PMO are now in the thick of actions that are directly going to benefit private power producers at the cost of a public sector company which is 90 percent owned by the government of India.

The moot point is this: should CAG merely be chasing illusory loss figures from the past, when clear losses are going to happen from executive action now in the works?

This does not mean the CAG should not do its statutory job of auditing government decisions and indicating potential losses to the exchequer - it should, if only to learn lessons for the future - but when everyone knows more losses are about to happen, it can’t even blow the whistle.

Maybe, the CAG’s ambit of responsibility comes only post-facto. There is a need for it to audit processes when they are being set up so that scams can be prevented rather than just discovered after the loot is over and done.