SC coal blocks verdict will ruin Manmohan Singh's reputation- and the power sector

The Supreme Court’s order in the coal blocks allocation case today (25 August) will have far-reaching implications for policy-making and economic growth. In fact, it is even more damaging to the economy than the cancellation of 2G licences in February 2012.

The order says, inter alia, that all coal blocks allocated since 1993 - when the sector was opened up for captive mining by the power sector - are illegal because the process followed for allocation was non-transparent and dodgy. The mines which have already started production will have to pay a fine - to be decided on 1 September - and those yet to produce a single tonne of coal may end up either losing the allocation or paying through their noses for it.

The ultra mega power projects (UMPPs) which were allocated coal blocks on the basis of tariff-based bidding will not be deallocated, but they have been banned from selling coal commercially to third parties. Now they can use the coal only for power generation. This shows that private parties bidding for projects on one set of assumptions cannot get the conditions eased after being allocated the mines. Tata Power had objected to Reliance Power being allowed to sell excess coal from its captive mine at Sasan to another power plant.

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While several governments - Congress, UF, NDA and UPA - will be in the dock due to the Supreme Court’s blackballing of coal block allocations since 1993, former Prime Minister Manmohan Singh, under whose watch most of the coal blocks were allocated during UPA-1 and UPA-2, will be the man in the hot seat.

While the earlier allocations were few and far between, some 155 of the 218 blocks allocated came when he was Prime Minister. The bulk of these were allocated when he held additional charge as coal minister some time between 2004-09.

The Supreme Court order comes as a booster to the prestige of the former Comptroller and Auditor General Vinod Rai’s report of 2012 on the coal block allocations, where he had computed the “undue gains” to private parties as a result of these non-transparent allocations at Rs 1,86,000 crore. Rai’s forthcoming book on his tenure is likely to suggest that he was under pressure not to name names in his final report on the coal blocks scam.

As _Firstpost_ noted earlier , the final CAG report clearly reflected “the fact that Manmohan Singh had agreed to introduce competitive bidding for the allocation of coal blocks on 14 October 2004, but his office indulged in adopting delaying tactics.”

CAG said: “It was decided in a meeting with the Prime Minister on 14 October 2004 that coal blocks will be allocated on competitive bidding. All applications received till 28 June 2004 would be allowed to pass through a Screening Committee, which used to allocate captive coal blocks without any fee and just on the recommendations of the state government or the Union ministry.”

But this did not happen.

The Prime Minister had, in fact, rubbished the CAG's report in a debate in parliament, and claimed that the loss notions were wildly out of sync with reality since they were based on Coal India’s costs. He gave four reasons for claiming so. First, as we noted at that time, the CAG’s “computation of extractable reserves based on averages would not be correct.” Secondly, “the cost of production of coal varies significantly from mine to mine even for CIL due to varying geo-mining conditions, method of extraction, surface features, number of settlements, availability of infrastructure, etc.”

“Third, CIL has been generally mining coal in areas with better infrastructure and more favourable mining conditions, whereas the coal blocks offered for captive mining are generally located in areas with more difficult geological conditions.” And fourth, “a part of the gains would in any case get appropriated by the government through taxation and under the MMDR Bill (Mining and Minerals Development and Regulation Bill) presently being considered by the parliament,” under which “26 percent of the profits earned on coal-mining operations would have to be made available for local area development.”

However, there is no denying that some loss was incurred when you give away coal blocks for free. And these blocks were given away free just when global prices were heading for the roof. If one looks at the long-term trend in coal prices, upto July 2003, prices were in the range of $25-30 a tonne when the cost of production was around $30. So few parties allotted blocks between 1993-2004 could have made a killing from the allocations. Even Coal India was making huge losses before 2004.

But after 2004, when Chinese demand surged, coal prices soared to $60 and then zoomed to $180 by July 2008. Thus, the losses were biggest when Manmohan Singh’s government allocated coal blocks to private parties in an opaque way.

The larger implications of the Supreme Court’s decisions will, however, go beyond just embarrassing Manmohan Singh. It will singe the economy for fivereasons.

One, all power plants operators will now have to pay penalties, and this has implications for power prices.

Two, the reallocation process, which the Supreme Court will take some time to decide, will lead to delays and more policy uncertainties.

Three, at a time when global coal prices are falling, domestic prices are likely to rise due to this whole process.

Four, the banks which lent money to power producers will find many more loan accounts turning sticky. They will have to rework their bad loan balances.

Five, the government may want a say in how coal blocks are allocated, since this is a policy decision that can’t be left just to the courts. This can lead to more delays if executive and courts are fighting over the issue.

The Supreme Court was right to blackball the process, but the government will now have to wrest the policy-making process back from it by presenting a transparent policy.