Wrong again: Why PM's attack on CAG is off the mark

An auction held in MP in 2008 shows that CAG's estimate of losses from coal block allocations were far below what they really could have been.

R Jagannathan August 27, 2012 14:08:02 IST
Wrong again: Why PM's attack on CAG is off the mark

The Prime Minister’s feisty response to the Opposition’s din over the allocation of coal blocks to private parties is simple: there was no scam, and even the Comptroller and Auditor General (CAG) had no business trying to arrive at a figure of Rs 1,86,000 crore in undue gains.

This is how the Prime Minister picked holes in the CAG’s math. As he noted, CAG had computed financial gains as “being the difference between the average sale price and the production cost of Coal India Ltd (CIL) of the estimated extractable reserves of the allocated coal blocks.”

This was wrong for four reasons, the PM said (read his full speech here)

First, “computation of extractable reserves based on averages would not be correct.”

Second, “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.”

Wrong again Why PMs attack on CAG is off the mark

PM's attack on the CAG’s calculations are a bit off the mark.

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.”

We have news for you, Dr Singh. You are right with a small ‘r” and Wrong with a big ‘W”.

You are right that the CAG has got its sums wrong, but this is because it has given you a far smaller estimate of unwarranted gains than is warranted.

Forget, for a moment, the exclusion of public sector companies which were allotted coal blocks from the computation of losses.

But here’s the point. It’s not as if the CAG had no benchmark against which to estimate losses. If anything, the established benchmark shows that the CAG may have grossly underestimated the losses.

According to The Economic Times, in November 2008, six coal mines were put up for auction by the Madhya Pradesh State Mining Corporation (MPSMC). The newspaper quoted a senior official of the corporation as saying: "The minimum bid price was set at 200 percent of royalty."

The CAG calculated its loss estimates based on an average profit of Rs 295 per tonne. But guess what the winning bids were for the MPSMC mines?

It was a phenomenal Rs 700-2,100 per tonne. That is, from more than two to more than seven times the CAG profit assumptions.

If we take the average profit at Rs 900 per tonne, the CAG’s estimate of undue gains would go beyond Rs 5,00,000 crore on a conservative basis. It may even be closer to the Rs 10 lakh crore that the CAG originally indicated. (The previous sentence has been added following a correction in the upper end of the bid range from Rs 700-1,200 in our original version to Rs 700-2,100 per tonne).

But there’s more. The PM also made much of the fact that actual coal production costs would vary according to “geo-mining conditions, method of extraction, surface features, number of settlements, availability of infrastructure, etc.” He also implied that since Coal India “has been generally mining coal in areas with better infrastructure and more favourable mining conditions”, its costs would be lower. If private parties allotted coal blocks had more difficult areas, their costs would be higher and gains lower.

Or so the PM seemed to suggest.

Unfortunately, here too the MPSMC auction has a different pointer. The Economic Times says all six of the MPSMC mines were underground – and not open-cast like CIL’s. An MPSMC official is quoted as saying: “Their extraction cost is greater than when they are from open-cast mines. Also, the quantum of coal that can be extracted will be less. Despite that, companies bid well above the existing royalty rates."

For the record, the winners in the MPSMC auctions were ACC, Monnet Ispat, and Jaypee Group.

The only point on which the PM is half-right is that the gains have been calculated before tax, and that the Mining and Minerals Development and Regulation Bill will take away 26 percent of net profits for local area development.

However, even here the lower gains are predicated on the assumption that the MMDR Bill will see the light of day. There is no way the CAG could have assumed that as it is still not law.

The PM also made it a point to mention that he was doing nothing more than follow the coal allocation policy followed since 1993. What he forgot to mention was that the coal situation was completely different before 2004.

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 cost of production was around $30, says Goa-based economist Rajendra Kakodkar. Coal India was making huge losses.

So if coal blocks were given out “free”, nobody could really have made a killing on it even then. It was only after 2004, when Chinese demand surged, that coal prices soared to $60 and then zoomed to $180 by July 2008 (it has now settled above $100-105 a tonne).

After July 2004, at prices of $60 or more, profits per tonne were in excess of $30 – and this was the reason why the then Coal Secretary suggested auctions. So comparing the situation before 2004 and later is simply not tenable.

Sorry, Dr Singh. You attack on the CAG’s calculations are a bit off the mark.

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