SC order on coalgate: Govt shouldn't auction coal blocks, here's a better option

The apex court in the infamous 2G case had laid down peremptorily that natural resources must be sold only through auctions as larger public interest was involved. Implicit in the apex court’s worldview was the assumption that auction begets the best deal for the government and by extension for the taxpayers and citizens of the country.

However, on a review petition the Supreme Court conceded that it was for the executive to decide which mode was the most appropriate in the circumstances of the mineral/natural resources on the block at the time. It was not a complete climb-down inasmuch, as the apex court added in the same breath that it reserved the right to intervene if it suspected foul play or less than due application of mind in choosing the mode.

The climb-down if at all was thus half-hearted and more in response to the prevailing mood of the pink press which questioned the wisdom of a sweeping, dogmatic, one-side-fits-all law enunciated by the apex court. It was as if the Court was saying auction was the best, but it was yielding slightly to the rival viewpoint.

The Supreme Court has now declared illegal coal allotments made between 1993 and 2012 on the grounds that the allotments made by the screening committee of the central government was an opaque mechanism. It will soon follow up its today’s order with a nuts and bolts order that will spell out how the government should reallocate these mines. One hopes it does not once again set store by the auction mode, which has an instant appeal but on deeper reflection and passage of time proves to be woefully falling short.

In the United States the government has often been pilloried for auctioning coal. In the auctions for coal mines in Montana and Wyoming since 1991 of 26 blocks, one bidder bagged as many as 22. Much the same happened in India when BALCO’s controlling stake of 51% was put on the block by the NDA-I.

The only bidder was Sterlite Industries, which walked away with the company for Rs 500 crore. The Communists screamed foul. They said if Sterlite were to put up a similar plant at the same location, it would have cost it not less than Rs 5,000 crore and the fair price for 51% stake in the state-owned BALCO was therefore, at least Rs 2,500 crore.

However, no one would show interest in disinvestment unless something was left on the table. Critics in the US have been vociferous that too much has been left for the mining companies that buy the mines upfront and make profits by shipping coal mainly to power utilities. Australia, another mineral rich country, has been for some time now using the royalty model.

Revenue sharing or royalty seems to be the best. Let coal mines in India be allotted to power and steel producers (for whom superior grade coke is needed). They would be free upfront but with the rider that a certain predetermined percentage of selling price, be it from sale of power or steel, would accrue to the government. This is at once fair both to the exchequer and the power/steel producer. What mother earth holds in her capacious womb is unknown except in broad, vague terms, despite the advances in geological surveys. Which is why just one bidder turned up at the BALCO auction and presumably in the US auction for coals referred to above.

Both producers and the government would have no reason to complain if royalty were to be mandated. No accusing finger would be pointed and no allegations would be bandied about because the government would get a revenue stream spanning several years. If the natural resources thus begotten were to be hoarded, it would not pay off because sooner or later the minerals have to come to surface. Strict monitoring will be needed lest the government is fobbed off with statistics of lower production. The point is: royalty is a more pragmatic dispensation vis–vis the theoretically more alluring auction.

Auction cuts both ways. If the winner of the bid overpays, he reaps the bitter harvest of a winner’s curse and the government pats itself on the back for being prescient. But if he has underpaid, in retrospect the government is in the dock for selling natural resources cheap. Royalty ensures that the fortunes of the exchequer are tied with those of the producer. The one who offers a greater percentage of royalty begets the mine.

The winner’s curse comes to haunt one in an auction. It doesn’t haunt as much in the case of royalty, given the fact that it is only a small sliver of sales that a company has to part with year after year or month after month to the government. The government perhaps would have got a better deal had it settled for royalty, at least for the bauxite deposits of BALCO.