Rs 10.67 lakh cr coal scam? Is CAG trying to shock us again?

The “auction” word is becoming an albatross around the UPA’s neck. First, it was the 2G scam, where it failed to auction scarce spectrum. Then came the Supreme Court judgment cancelling 122 telecom licences. The judgment extolled the virtues of auctioning scarce national resources.

Egged on probably by that judgment and the rave reviews it got from the media for blowing the whistle on Andimuthu Raja’s spectrum scam, the Comptroller and Auditor General (CAG) has now thrown up a loss figure of Rs 10,67,000 crore for “undue benefits” given to companies that were allocated coal blocks without an auction between 2004 and 2009.

The beneficiaries include, among others, Tata and Birla companies, Jindal Steel, the Anil Agarwal (Vedanta) and Anil Ambani groups, the Adanis, Arcelor Mittal and several public sector firms.

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According to The Times of India, which broke the story, this is how the loss figure was arrived at. “First, an estimate of the cost of production for each block was arrived at by taking into account the actual cost of production in a similar Coal India mine for the same year. Then the difference between CIL’s sale price and cost of production was multiplied by 90 percent of the reserves in each block. The figure thus obtained was the windfall gain for that block.”

There are several problems in arriving at loss figures this way.

First, it seems the CAG is trying to shock with numbers that are at best guesstimates. Like the spectrum scam’s Rs 1,76,000 crore presumptive loss, Rs 10,67,000 crore is a huge number. Both may indicate the need for a deep probe, but in themselves they do not add up to a scam.

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Second, this kind of guesstimate undercuts policy decisions. It is not the business of courts or the CAG to tell the government what it should do to develop the country. Perhaps, the gains were intended to entice companies to invest in the power sector.

Third, it leaves no scope for judgment on what will work. If no one is coming forward to set up power plants, maybe they need the coal bait to get started. We are not arguing that this is the case here, or that the CAG may be wrong in its analysis, but that governments are elected to implement policies according to their best politico-economic judgments. CAG’s opinion on what is right or wrong is only that - an opinion.

Fourth, the real job of courts and the CAG is to see whether the government is less than transparent, or doing anyone undue favours. This is true whether we are talking about the 2G spectrum scam or the coal block allotment “scam” - if there was one.

We now know that there was indeed a scam in the 2G spectrum allotments, but it was not because of the low prices set by Raja. Rather, the real scam relates to arbitrary changes in cutoff dates to the first-come-first-served policy and favouritism in licence and spectrum allotments - which both the then finance minister and the PMO were probably aware of but did little to stop in the name of coalition politics.

So was there a real scam in the allocation of coal blocks? And if, yes, what is the nature of the scam?

According to the Times report, the CAG has listed both private and public sector companies as deriving “undue benefits” from their allocations. While private firms allegedly got more than Rs 4.79 lakh crore, public sector firms got Rs 5.88 lakh crore.

Without reading the full report, Firstpost believes that it is difficult to establish a real scam - unless there were malafide motives and irregular allocations of coal blocks to some or all the parties.

However, the mere fact that private players may have benefited from the allocation of coal blocks does not amount to a scam if the government decided to do so with its eyes open - and in a fairly transparent manner. The scam, if any, will have to establish malafide intent and cronyism.

In fact, there is a strong case for allowing the CAG to vet the processes adopted in such allocations before they are made rather than after.

A small illustration will show why. If I sell a share today at the market price and tomorrow the prices zoom for various reasons, can I claim I was cheated by the buyer?

But this is the sum-total of what the CAG’s argument. Private parties can sometimes make

“undue” gains for reasons that are unrelated to the original decision and because the market has moved in their favour.

A better idea would be for the government to ask the CAG to give it estimates of potential losses to the exchequer and likely gains to private parties before a decision is taken to hand over scarce natural resources for private and public sector exploitation.

In some cases, it may make sense to give “undue benefits” to private parties for reasons that could include lack of capital or knowledge in a particular industry, improving efficiencies, etc. In any case, governments can legislate windfall profits taxes - as the Australian government is trying to do with the mining industry now.

But if the government has some idea of what the potential losses in revenue could be, maybe it can take better decisions on whether to auction a resource of hand it out free. And there could be several options between the two extremes - which is what the Supreme Court judgment in the 2G scam and the CAG reports seem to miss. It is not their job to take a judgement call on what is best for the country - as long as things are done transparently.

Coming back to the coal block “scam”, the CAG is right to point out potential losses to the exchequer, but this estimate would have been more useful to the government before it took the decision to hand over the blocks.

The costs and benefits would then have been easier to calculate.

The CAG loss estimates should become the horse rather than the cart. By coming up with loss estimates after the event, the CAG may be trying to shut the door after the horse has bolted.

Or worse, it may be tying the government’s hands for good - which surely cannot be good for governance.

Shock-therapy worked in the 2G scam, but large loss numbers will soon become counter-productive and take attention away from CAG’s real competence: looking for forensic evidence of skulduggery and wrongdoing.