Why Manmohan Singh was better off being silent

So the prime minister Manmohan Singh has finally spoken. But there are multiple reasons why his defence of the free allocation of coal blocks to the private sector and public sector companies is rather weak.

“The policy of allocation of coal blocks to private parties…was not a new policy introduced by the UPA (United Progressive Alliance).  The policy has existed since 1993,” the PM said in a statement to the Parliament on Monday.

But what the statement does not tell us is that of the 192 coal blocks allocated between 1993 and 2009, only 39 blocks were allocated to private and public sector companies between 1993 and 2003.

The remaining 153 blocks or around 80% of the blocks were allocated between 2004 and 2009. Manmohan Singh has been PM since May 22, 2004. What makes things even more interesting is the fact that 128 coal blocks were given away between 2006 and 2009. Manmohan Singh was the coal minister for most of this period. Given that almost 80% of the allocation happened during the UPA rule, the excuse of trying to blame past policy falls flat. Also, we need to remember that even in 1993, when the policy was first initiated, a Congress party-led government was in power. 

The PM further says that “according to the assumptions and computations made by the CAG, there is a financial gain of about Rs1.86 lakh crore to private parties. The observations of the CAG are clearly disputable.”

What is interesting is that in its draft report which was leaked earlier in March this year, the Comptroller and Auditor General (CAG) had put the losses due to the free giveaway of coal blocks at Rs10,67,000 crore, which was equal to around 81% of the expenditure of the government of India in 2011-2012.

Since then the number has been revised to a much lower Rs1,86,000 crore.  The CAG has arrived at this number using certain assumptions.  The CAG did not consider the coal blocks given to public sector companies while calculating losses. The transaction of handing over a coal block was between two arms of the government.  The ministry of coal and a government owned public sector company (like NTPC).  In the past when such transactions have happened revenue from such transactions has been recognised.  A very good example is when the government forces the Life Insurance Corporation of India to forcefully buy shares of public sector companies to meet its disinvestment target.

One arm of the government (LIC) is buying shares of another arm of the government (for eg: ONGC).  And the money received by the government is recognised as revenue in the annual financial statement.  So when revenues from such transactions are recognised, so should losses. Hence, the entire idea of the CAG not taking losses on account of coal blocks given to pubic sector companies does not make sense.

If they had recognised these losses as well, losses would have been greater than Rs1.86lakh crore (as was the case in the draft report). So this is one assumption that works in favour of the government. The losses on account of underground mines were also not taken into account.

The coal that is available in a block is referred to as geological reserve. But the entire coal cannot be mined due to various reasons including those of safety. The part that can be mined is referred to as extractable reserve. The extractable reserves of these blocks (after ignoring the public sector companies and the underground mines) came to around 6282.5 million tonnes.  The average benefit per tonne was estimated to be at Rs295.41.

As Abhishek Tyagi and Rajesh Panjwani of CLSA write in a report dated August 21, 2012, “The average benefit per tonne has been arrived at by first, taking the difference between the average sale price (Rs1028.42) per tonne for all grades of CIL (Coal India Ltd) coal for 2010-11 and the average cost of production (Rs583.01) per tonne for all grades of CIL coal for 2010-11. Secondly, as advised by the ministry of coal vide letter dated March 15, 2012 a further allowance of Rs150 per tonne has been made for financing cost.  Accordingly, the average benefit of Rs295.41 per tonne has been applied to the extractable reserve of 6282.5 million tonne calculated as above.”

Using this is a very conservative method CAG arrived at the loss figure of Rs 1,85,591.33 crore (Rs 295.41 x 6282.5million tonnes).

Manmohan Singh in his statement has contested this. In his statement, the PM said “first, computation of extractable reserves based on averages would not be correct. Secondly, 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.”

As the conditions vary the profit per tonne of coal varies. To take this into account the CAG has calculated the average benefit per tonne and that takes into account the different conditions that the PM is referring to. So his two statements in a way contradict each other.  Averages will have been to be taken into consideration to account for varying conditions. And that’s what the CAG has done.

The PM’s statement further says “Thirdly, 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.”

Let’s try and understand why this statement also does not make much sense. As The Economic Times recently reported, in November 2008, the Madhya Pradesh State Mining Corporation (MPSMC) auctioned six mines.  In this auction the winning bids ranged from a royalty of Rs 700-2100 per tonne. In comparison the CAG has estimated a profit of only Rs 295.41 per tonne from the coal blocks it has considered to calculate the loss figure. Also the mines auctioned in Madhya Pradesh were underground mines and the extraction cost in these mines is greater than open cast mines.

The profit of Rs 295.41 per tonne was arrived at by the CAG by considering only open cast mines were costs of extraction are lower than that of underground mines. The fourth point that the PM’s statement makes is that “A part of the gains would in any case get appropriated by the government through taxation and under the MMDR Bill, presently being considered by the Parliament, 26% of the profits earned on coal mining operations would have to be made available for local area development.” Fair point. But this will happen only as and when the bill is passed. And CAG needs to work with the laws currently in place.

A major reason put forward by Manmohan Singh for not putting in place an auction process is that “major coal and lignite bearing states like West Bengal, Chhattisgarh, Jharkhand, Orissa and Rajasthan that were ruled by opposition parties, were strongly opposed to a switch over to the process of competitive bidding as they felt that it would increase the cost of coal, adversely impact value addition and development of industries in their areas.”

That still doesn’t explain why the coal blocks should have been given away for free. The only thing that it does explain is that maybe the opposition parties also played a small part in the coalgate. To conclude Manmohan Singh might have been better off staying quiet. His statement has raised more questions than provided answers. As he said on Monday, Hazaaron jawabon se acchi hai meri khamoshi, na jaane kitne sawaalon ka aabru rakhe. For once, he should have practiced what he preached.

(Vivek Kaul is a writer and can be reached at vivek.kaul@gmail.com)