Special investigation

Are the coal block auctions as successful as the Modi government claims?

Scroll's analysis of the recent auctions of coal blocks finds a worrying lack of transparency and a baffling divergence in the winning bids. Eight blocks have seen winning bids lower than the notified price of coal.

At a gathering in Paris last month, drawing attention to the coal block auctions that have taken place under his government, Prime Minister Narendra Modi boasted, “Twenty coal blocks out of 204 have been auctioned so far and we got more than Rs. 2 lakh crore from them.” The factual error in the statement – 31 blocks, not 20, have been auctioned in two rounds – might be the least of the problems with the government's triumphal sentiment.

To start with, as a report in Business Standard explains, the Rs 200,000 crore is not a one-time payment flowing into government coffers, but revenues that are likely to accrue over the lifetime of the mines. These revenues include royalties that states would have earned regardless of whether the mines had been allotted or auctioned.

While auctions are an improvement over the discretionary allotments of the past, and the government has shown swiftness in moving ahead with them, what isn't well understood is that the design of the auctions has a significant impact on their transparency and outcomes. Competitive auctions are meant to provide a market-based mechanism to discover the value of a resource. But poor design could impede price discovery.

As the government prepares for a third round of auctions, Scroll in a two-part series, takes a closer look at the first two rounds. Our analysis raises worrying questions about both the design of the auctions and their outcomes.

The design

For the auctions, the coal blocks were divided into two categories – regulated and unregulated. Power projects fall in the regulated category. Eleven blocks have been auctioned in this category through reverse bidding, where bidders had to compete on the discount they would give electricity boards on their cost of mining. In India, the cost of coal is passed down to the end customer. In other words, if two companies' cost of mining is Rs 500 per ton and one offers to charge the electricity board Rs 350 while the other wants to charge Rs 400, the first one will win.

Steel, cement, aluminium and captive power plants fall in the unregulated category where blocks were auctioned through forward bidding. Here, whoever is willing to pay the most gets the block. Twenty blocks were auctioned in this category.

The auctions were conducted in two stages. The first stage – the technical bid – was open to all companies. In the second stage, 50% of all technically qualified bidders or five bidders, whichever was higher, were selected for the electronic auction. What shrunk the pool further was that companies were allowed to place bids in two ways – either as a single bid for the company, or on behalf of their individual power plants. There are apprehensions that the two conditions have resulted in shallow auctions, with few participants.

Capping the bids

It is unclear why the government decided to not allow all the technically qualified companies to bid in the second stage. Vivek Bhardwaj, a joint secretary in the Coal Ministry who is overseeing the auctions, did not explain the decision to cap the number of bidders. Instead, he said the matter had been examined by the Delhi High Court and that it had agreed with the Centre's decision.

He is partly right. The clause limiting bidders in the second round led Sarda Energy and Minerals to challenge the auctions in the Delhi High Court. The judgement from Delhi High Court judges, Badar Durrez Ahmed and Sanjeev Sachdeva, contains this summary of Sarda's apprehension: “The case of the petitioner is that...a single company, having several end-use plants, can have multiple bids...this essentially means that while there may be four bids for separate specified end-use plants of the same company, but that may boil down to only one bidder. And, therefore, in that sense, competition may be stifled at the electronic auction stage.”

In its defence, the government cited the difference between the floor price and the closing bids to argue the auctions were working well. In their judgement on February 18, Ahmed and Sachdeva accepted the government's defence.

However, a month later, energy and coal minister Piyush Goel told the Lok Sabha the ministry was investigating if Jindal Power and Balco had won blocks by forming a cartel. In the block of Gare Palma IV/2 &3, for instance, there were just three bidders – Jindal Power, GMR and Adani. Jindal had put in three bids on behalf of three discrete power projects. Shortly after the bids, the coal ministry rejected bids from both companies. Press reports at the time said the ministry felt these did not reflect “fair value” of the coal.

Value of the coal

But what does fair value of a coal block mean?

Currently, about 90% of the coal mined and sold in India comes from Coal India Limited, the government mining company, at prices fixed by the Coal Ministry. Called notified prices, these vary per grade and are less than half of the price of imported coal of an equivalent grade. They are also lower than the price at which Coal India sells small quantities of coal through e-auctions. For all practical purposes, the notified price is the lowest price at which a company can legally get coal in India.

While bidding for a coal block, a company is expected to calculate the advantage it gets by having its own captive block over rivals who buy coal from Coal India – whether it is through e-auctions or the notified price. Put differently, a company has to find a price where it can pay the government for the unmined coal, pay royalties and taxes, incur mining costs, and still be competitive against its rivals.

At the same time, as demand for coal rises, Coal India's supplies have come under pressure, creating uncertainty for its buyers – who have had to mix domestic with expensive imported coal. For this reason, companies were expected to see value in bidding above the notified price – for the sake of fuel security.

The notified price, hence, is the fulcrum over which the value of the coal rests, but it is not the sole factor.

For the auctions, the government has relied on the notified price to arrive at the value of the coal reserves in each block. It has defined a floor price from where the bidding has to start. This price, says Bhardwaj, was determined by subtracting the cost of mining from the notified price of the coal in each block.

Scroll has compared the notified price of each block with the final winning bids. This analysis shows an extremely wide divergence between the notified price and the winning bids.

Methodology

Before we get to the results, a note on our methodology. Notified prices vary according to the grade of coal, which in turn is based on the coal's gross calorific value, or the heat generated when the coal burns. The greater the heat generated, the higher the grade of coal, and the higher its price. We had to rely on the summaries of the coal blocks made public by the Coal Ministry, which only give a broad range of the grade of coal from grade A to G, which are older categories that do not reflect sharply the calorific value of the coal. More detailed information was available in dossiers for which companies had to pay Rs 5 lakh each.

To arrive at the notified price of the coal in a particular block, we took the average calorific value of a grade. In blocks with two grades of coal, an average of their notified prices was taken. In blocks with multiple grades of coal (say, from grade B to grade F), the notified price of the middle grade was taken – grade D. When one grade of coal was more prevalent – say, a block has 90% grade C and 10% grade B – its notified price was taken.

With these assumptions, the notified price of the coal in 19 coal blocks in the unregulated sector was compared with the winning bid.

Four blocks saw bids which exceeded the notified price by 100%. One block went for a price that was over 200% of the notified price.


Three blocks went at an increase of more than 50% of the notified price and four blocks at an increase of less than 30% of the notified price.


Most startlingly, eight blocks were auctioned at less than the notified price. One block, Meral, fetched just 26% of the notified price.


Offering an explanation for the low bids, the head of a coal mining company said: “Some of these blocks are hard to mine. They are smaller than the power sector blocks. The mining conditions are difficult. Some of these blocks, like Meral, are in Naxal areas. Any company which wants to mine there will have to pay levies to the local cadre.” Given the smaller size of the blocks, he added, cost of land acquisition and rehabilitation will be disproportionately high.

This view was challenged by Sudiep Shrivastava, a lawyer and activist who was one of the key litigants in the Supreme Court in the case that led to the cancellation of coal block allotments in 2014. “The low bids are surprising because these are blocks for which bulk of the land has already been acquired and mining is already underway or is about to begin,” he said.

There is strong divergence even amongst bids within a single coalfield. Take Gare Palma coalfield in Chhattisgarh. Five of its blocks were auctioned. The bids ranged from Rs 1,585 per ton to Rs 3,502 per ton. Even the auctions in the power sector show similar divergence. The winning bids range from Rs 108 per  ton to Rs 1,110 per ton.

While some divergence in the final bids is expected, given the unique characteristics of each coal block, the quantum of coal, the cost of mining, the bidding company's urgency to have a predictable coal supply, but what does such wide divergence say about "fair value" of coal?

When asked about this in a phone conversation, Bhardwaj disputed Scroll's findings. He said none of the winning bids were less than the notified price based on the government's calculations. He offered to look at Scroll's findings but did not get back when they were mailed to him.

During the bidding, Coal Secretary Anil Swaroop had tweeted the floor price and winning bids for each block. Later, the ministry collated and uploaded a document which showed the winning bids. But a document showing the floor price of the blocks has still not been made public. Scroll asked for a document but Bhardwaj did not provide one.

Defending the government's decision to withhold more detailed information about the grades and the estimated value of coal reserves in each block, making it available only to those who could pay, he said: “This is commercially useful information for companies. Why should I give it for free? These are national resources and we need to get the best value for them.”

Ironically, it is this lack of information – not to mention the cap on the number of bidders in the second round – which makes it impossible to assess whether the auctions generated fair value.

The second part will look at the viability of bids in the reverse auctions for the power sector.

We welcome your comments at letters@scroll.in.
Sponsored Content  BY 

We asked them and here's the verdict: Scotch is one of the #GiftsMenLove

A handy guide to buying a gift for a guy.

Valentine’s day is around the corner so men and women everywhere are racking their brains for the perfect present. Buying a gift for men though can be a stressful experience. Be it a birthday, celebration or personal milestone, many men and women find it difficult to figure out what their male friends or significant others want. That’s why TVF decided to perform a public service and ask the guys directly what they loved. So, the next time you’re running around to buy a gift for a man, just pick something from the list below and thank us later.

Watches: A watch can complete a man’s ensemble and quickly become a talking (or bragging) point at a party. If your man loves classics, a vintage HMT (if you can find one) with a metal strap should be your brand of choice. For fun-loving guys, try a Swatch watch with a pop-coloured leather strap or even a watch with Swarovski crystal studded dials from a variety of watchmakers. Fossil’s unconventional dials will delight a creative or artistic soul. Alternatively, the G-shock collection by Casio is reasonably priced, waterproof and perfect for those who love adventure sports. If your man is a fitness enthusiast, surprise him with an excellent fitness band from GoQii.

Image Credits: Pexels
Image Credits: Pexels

Whisky: A well stocked bar is every man’s pride and joy. Whisky, especially scotch is an extremely popular gift with men. It is a gift that can be displayed with pride and shared on occasions with friends and family. Scotch is any whisky (single malt or blended) that comes from Scotland, is usually aged for at least three years (often more) and distilled twice. Each region in Scotland produces whisky with a distinct flavor. Spirits from Islay, like Laphroaig, tend to have a strong peat flavor while single malts from Speyside tend to be lighter and sweeter. Connoisseurs will sing praises of the golden colour of blends like Johnny Walker or Black and White, and the smoky taste of Scotch whiskies like Black Dog. If your partner is truly mad about malts, go the whole hog and surprise him with a malt tour in Scotland - the ultimate whisky experience.

Image Credit: Pexels
Image Credit: Pexels

Jackets: For a more personal touch, a jacket can be quite an apt gift. A romantic-at-heart will love a traditional bandhgala while bike enthusiasts swear by their weather-worn leather jackets. Blazers are great day-to-night apparel, looking perfectly at home in the office or in a bar. You’ll be spoilt for choice when it comes to brands and designers: high street labels like Blackberry’s and Zara offer trendy outerwear at affordable prices. Custom made jackets like the ones from Raymond’s Made-To-Measure collection or the Bombay Shirt Company are also a great option, if you really want to get creative with the design.

Sunglasses: If your friend is a globetrotter, a smart pair of shades will delight him like nothing else. Whether he is sunbathing in the Maldives, chasing zebras in Tanzania or skiing in Courchevel, this travel accessory adds an instant glam quotient to almost every type of holiday. Recent sunglass trends have been a major throwback to retro shapes inspired from Hollywood films like Tom Cruise’s aviators from Top Gun, Steve McQueen’s Persols from The Thomas Crown Affair or the wayfarers sported by the lead actors in The Blues Brothers. You’ll find many variations at high street brands like H&M and Diesel but if you can stretch the budget, pick up a good quality pair from Burberry or Louis Vuitton. Better yet, buy a unisex design that you can borrow when your heart desires!

Image Credits: Pexels
Image Credits: Pexels

Headphones: Most guys love their music, whether their choice of genre is soft rock, hard metal or folk fusion. So, it makes sense that headphones are on the list of the most popular gifts loved by men. Make sure you know what you’re looking for when it comes to buying headphones. For style combined with comfort, Skull Candy headphones come in a fun palette of colours. For amazing sound quality and pumping bass, you can opt for Shure or Sennheiser; they may look basic but deliver on their audio capabilities. Audio-Technica headphones are also gaining a cult following among audiophiles for their excellent sound clarity. If your man listens to music while working out, get the Jabra Sports in-ear headphones which are made for the gym. Though it feels pragmatic, this gift will be treasured by all music lovers.

So, take a pick from this list and the guy you gift will be indebted to you for life! For more great gifting ideas, see here.

This article was produced by the Scroll marketing team on behalf of LiveInStyle and not by the Scroll editorial team.