The first part of Scroll's analysis of the coal block auctions took a close look at the auctions for the steel, cement and aluminium sectors. It found an extremely wide divergence in the winning bids. Some blocks went for twice the notified price of coal, or the price at which the bulk of India's coal is sold, while others fetched a quarter of it.
A similar divergence is also visible in the auctions of coal blocks for the power sector. Here, the concern is over the viability of the some of the bids.
In a report published on March 16, which analysed the second round of auctions for the power sector, stock brokerage firm HDFC Securities said, "We believe there is a high probability of end use plants becoming unviable, even after factoring in merchant sales."
Power plants in India run on coal supplied from Coal India or imported from outside. The cost of this coal is reimbursed to these power plants through what is called the "pass-through", which literally means the cost of coal is passed on to the end customer.
While auctioning coal blocks for the power sector, the government said it wanted to ensure power tariffs do not increase for the consumer.
For this reason, the coal ministry has turned to reverse auctions in the power sector.
Unlike forward auctions, where the highest bidder wins, in reverse auctions, companies compete on the discount they would give electricity boards on their cost of coal. In other words, if two companies' cost of mining is Rs 500 and one offers to charge the board Rs 350 while the other quotes Rs 400, the first will get the block.
However, when the auctions started, bids quickly touched zero and then became forward auctions. What does that mean? That the winner will, in addition to not charging the electricity boards any “cost of coal” at all, will also pay the centre what it has bid for every ton of coal it mines.
The question of viability
Unlike power plants that source coal from Coal India and get a pass-through (their coal cost is reimbursed), those who have won the auctions will not be eligible for a pass-through.
This raises questions about viability. In the case of Essar Power, which has bid Rs 1,110 per ton for Tokisud (North), an industry consultant said, “If the cost of mining the block is Rs 400 per ton, then Essar has to add another Rs 1,100 to that. After spending Rs 1,500 per ton, and not being eligible for a pass-through, how will they compete with other power plants?”
When asked if the company's bid is viable, Rabin Ghosh, joint general manager (corporate communications) at Essar, said on email: “Being commercially sensitive information, we would not like to offer any comments on the queries.”
The Adani group, which bid Rs 302 per ton to bag Jitpur block, did not respond to Scroll's questions.
However, a spokesperson from Jindal Steel and Power Limited admitted, “There are issues in absorbing the cost, but you will appreciate that coal is required for operating such huge capacity power projects which have been set up after making huge investments.” Jindal Power had bid Rs 126 and Rs 108 to land two coal blocks – Tara and Gare-Palma IV/2 & 3.
Vinayak Chatterjee, the chairman and managing director of Feedback Infra, an infrastructure consultancy explained that companies are trading off profitability against fuel security. "They are bidding aggressively to ensure fuel security even at the cost of profitability," he said.
But this creates longer term questions of survival. “Assuming even a 3% growth in inflation, what these companies have bid will double in the next eight years," said the industry consultant. "These projects will come back to the government for renegotiation.”
Alternately, the consultant said the companies will try and recoup some of the money by selling some coal – as washery rejects – in the open market. But that creates an outcome where these companies make money, not on their core activity, but from a sidelight. Else, the companies will turn sick and add to the burgeoning non-performing assets in India's banking sector.
Either way, a part of that Rs 200,000 crore the government is announcing as revenues from the auctions will never materialise.
Some countries, added the consultant, incorporate systems for defining prudent and speculative bids into their auction design. “If the bids received are surprising, there is an attempt to understand if there is a disconnect between what the government wants and what the bidders understood, or how the bidders's numbers can be viable," he said. "If the bidders say they can manage, then there is no space for renegotiating afterwards.”
Capping the bidders
It could be the case that some companies bid unviable numbers, panicking due to the coal shortage in the country or because they felt they could renegotiate later. But others have found themselves in auctions with very little competition.
As the previous story explained, the government has put a cap on the bidders in the auctions. 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.
This creates the possibility of cartelisation. Explained the head of a mining company who spoke to Scroll on the condition of anonymity, “If only three companies are participating in an auction, cartelisation gets easier. Three companies, each with a preference for different blocks, could collude to keep rivals out.”
When asked about the risk of cartelisation emanating from the decision to cap the number of bidders, Vivek Bharadwaj, a joint secretary in the Ministry of Coal, rejected any such possibility. The auctions, he said, are working “beautifully”. But that assertion sits uncomfortably with the ministry's decision to reject the bids from Jindal Power (for Tara and Gare Palma IV/2 & 3) and Balco (for Gare Palma IV/1).
"The company has followed the procedure prescribed for auction which is completely transparent," the spokesperson of Jindal Power said, declining a detailed comment on the allegation of the cartelisation, stating that the matter is subjudice.
No reversal possible
But the industry consultant said that the government should have identified trading patterns that would be construed as gaming the market before the auction. "You cannot go back after the auction and then undo," he said. "By doing this, you cast aspersions on your own system.”
The captive coal block allocation scam hurt India partly because it transferred ownership over coal to a handful of business families, and partly because it tilted competitive advantage in all sectors dependent on coal towards companies that had captive coal blocks.
Today, as the auctions progress, India might be heading in that direction once more.
The number of companies allowed to participate in the auctions is a small subset of all those who are applying. As for competitive advantage, some of the winning companies have captive blocks that have been very cheaply procured, while others have coal blocks that are very expensive. The companies that could not win blocks would continue to depend on the government mining company, Coal India Limited, or rely on imported coal, or find ways to source it illegally.
“The Indian penchant for meddling with free market prices has again reasserted itself," said Chatterjee.
When the Supreme Court deallocated all the captive coal blocks, India had a chance to clean up her coal markets. But that opportunity is gone. What we have again is a market with skewed competitive advantage.