Since the days of the industrial revolution, coal has played a crucial role in the development of industry. It has been a source for power generation as well as a critical input for many major industries. As one of the fastest growing economies in the world today, India is also largely dependent on coal for sustaining its expanding industrial structure. Coal is a critical input for power, steel and cement industries. It also continues to be the most dominant source of energy in India. Almost 52 per cent of primary energy needs in India are met by coal, while the world figure for the same is around 29 per cent. Coal contributes to around 60 per cent of India’s power generation (All India Installed Generation Capacity Report, January 2015, Central Electricity Authority). Incidentally, India is the world’s third largest coal producer, after China and the USA.
History of Coal Allocation Policies and Coal Auction
The Ministry of Coal under the Indian government is responsible for the development and exploitation, production, supply, distribution and pricing of coal and lignite reserves. Regulation of these activities is done through the government-owned Coal India Ltd, and the Neyveli Lignite Corporation. The Ministry also manages the government’s 49 per cent equity participation in the joint venture public sector Singareni Collieries in Andhra Pradesh.
According to the July 1992 Comptroller and Auditor General of India (CAG) report, the Ministry of Coal issued instructions for constitution of a screening committee for looking into proposals received for captive mining by private power generation companies. However the report admits that there were no specific instructions given regarding the formal procedures to be followed for the allocation of coal mines. Hence, coal mines were allocated to applicants only on the basis of a letter of recommendation. Because of the absence of regulation, the Indian government subsequently constituted an expert committee for coal sector reforms. As per the recommendations of this expert committee, there were several modifications made regarding the guidelines for the allocation of coal blocks by the Ministry.
Even after the guidelines were put in place, the import of both coking and non-coking coal increased significantly between 2006 to 2011. In 2006-07 the import of coking gas and non-coking gas stood at INR 10181 crores and 6508 crores respectively, totalling INR 16687 crores. These increased to INR 20862 crores and 20688 crores respectively totalling INR 41550 crore by 2011 as per the draft CAG Report.
For this reason, the CAG undertook an audit on ‘Allocation of coal blocks and augmentation of coal production’ in 2012. The report suggested that the Indian government should finalise the regulations of competitive bidding, besides stating that “auctioning of blocks was considered the acceptable selection process which was transparent and objective”. By the end of 2014 the government decided to auction coal blocks during mid-February 2015, using the electronic auction (e-auction) method.
Benefits of E-Auction
Besides efficiency, promoting competition, and ensuring revenue maximisation, there are several benefits of using the e-auction mechanism for allocating coal blocks, as listed on the Coal India Limited website.
Total transparency in coal marketing;
Equal treatment to all categories of customers without any discrimination;
Buyers getting coal of their choice in respect of source, grade, size/mode;
Buyers can purchase coal from anywhere in the country;
New consumers, snapped consumers and consumers seeking additional coal over and above their fuel supply agreement (FSA) quantity could buy coal under this scheme;
Tendency of diverting coal to secondary market at a premium is greatly reduced, if not fully eliminated;
No quota/linkage/sponsorship needed for purchase of coal;
Option for depositing money for registration/EMD online.
Tender Process for Coal Auction
According to the Ministry of Coal, coal mines are auctioned strictly for the utilisation of coal for specified end use. For the non power sector, the end use includes production of iron and steel, cement and generation of power for captive use for the non power sector, while for the power sector end-use is generation of power. Forward bidding (for unregulated sectors like steel, cement and captive power) and reverse bidding (for power generation) are the two prescribed methods for auctions. The tender process is conducted completely through electronic auction, on an electronic platform created by Metal Scrap Trade Corporation (MSTC) Limited, an enterprise of the Indian government; and, no physical bids are accepted or considered. Each bidder is required to pay a non refundable amount of Rs 5,00,000 as entry fee in order to participate in the auction. This applies to both the power and non power sectors. Upon payment of this entry fee, a bidder becomes eligible to download the tender document from the MSTC website. The tender process involves two stages. In the first stage, bidders are required to submit the bid security and the technical bid with a covering letter, along with the financial bid specifying the initial price offer, which cannot be less than the floor price. This floor price is pre-specified for individual coal mines. The nominated authority opens and evaluates the submitted bids and reserves the right to ask for any details, clarifications, or any other information in writing based on information provided by the bidders for evaluating technical bids or otherwise. The initial price offer of the bidders who meet the eligibility conditions, go through, and selection of technically qualified bidders involves ranking them on the basis of ascending and descending initial price bid submitted. The first fifty per cent of ranked or five technically qualified bidders, whichever is higher, are considered qualified bidders. In the event of qualified bidders being less than three, the concerned coal mine is subject to re-auction. The qualified bidder, who submits the lowest price offer during the e-auction, is the preferred bidder. Subject to the vesting order from the Indian government, the preferred bidder becomes the successful bidder.
Coal Auction 2015
In September 2014, the Supreme Court struck down the allocation of 204 coal mines after the CAG found that awarding the mines without an auction had cost the nation INR 1.86 trillion. The Indian government then initiated a coal auction in 2015. According to Power Minister Piyush Goyal (ndtv.com, March 10, 2015), the e-auction of 32 coal blocks, out of the 204 cancelled, “has already yielded potential e-auction revenues, royalties and up front payments of Rs 2.07 lakh crore, which is far in excess of CAG loss estimate of Rs 1.86 lakh crore.”
The auction was divided into several phases. The first phrase held between February 14 and February 22 allocated 18 coal blocks. The auction in this phase saw aggressive bidding, with the exercise out performing all expectations. The winning bid of Rs 2,860 per tonne for the 29.2 million tonne (mt) Kathautia mine in Jharkhand, reserved for the so called unregulated sector which includes cement, aluminium, steel and iron came from Hindalco Industries Ltd. A day earlier, the winning bid of Rs 1,402 per tonne for 6 mt Sial Ghogri block in Madhya Pradesh, which was also reserved for the unregulated sector, was won by Reliance Cements Pvt. Ltd. The Belgaum block in Maharashtra was won by Sunflag Iron and Steel Co. Ltd with a winning bid of Rs 1,785 per tonne. The total revenue collected from these auctions was Rs 1.35 lakh crore (Economic Times, March 10, 2015).
The second phase of the auctions that started on March 4 involved the allocation of 16 coal mines. By closing hours of March 13, the revenue collected stood at more than 2 lakh crore. Hence, 34 coal mines were auctioned and allocated in these two phases. However, 8 coal blocks have yet to be allocated to successful bidders. According to the Ministry of Coal, these blocks had comparatively low bids and their re-allocation would require a re-examination by the nominated authority.
Out of 43 coal blocks allotted to government companies, 42 blocks are meant for end use by the power sector. However, there has been no bidding for the allotment of these blocks, and hence, no apparent cut in power tariff. But, lower costs of coal could help companies keep their power rates low. Owing to stiff competition, the reserve price, which was to act as a ceiling was fixed as zero by the government. For every Rs 100 fall in the bid amount, the power rate falls by six paise.
Auction as a method of allocation has been in use for many years and still holds relevance in terms of efficiency and transparency. Since coal is a crucial resource, its allocation is also of crucial importance. Coal auctions done transparently can generate a good amount of revenue for the government. Hence, auctions can prove a reliable method for allocating coal mining rights. Although some analysts opine that aggressive bidding by companies may hike the prices for cement, steel and sponge iron—electricity tariffs are unlikely to increase as mines for these sector are auctioned through reverse bidding, where the lowest bidder wins the auction.