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Wednesday, April 4, 2012

Coalgate: Non-auction loss overblown, highly inflated

The leaked draft report of the Comptroller and Auditor General of India (CAG) on non-auction of coal blocks and alleged massive windfall gains for corporates has raised much controversy. But the fact of the matter is the market for coal is hugely distorted, the main output in downstream activity - power - is price-regulated and there are, in any case, huge risks in actually following through with mining operations, especially on a 'captive' non-core basis. 

Of the 209 captive blocks administratively allocated - mostly to power producers - by the coal ministry in recent years, no more than 29 had reportedly commenced production by last year.
That said, there is no reason why royalty on coal mining need remain meagre and insubstantial, or the allocation of coal blocks opaque, essentially via fiat, and cannot take place transparently, through auctions. Given the considerable proven deposits and heightened shortages likely in the medium term and beyond, we do need proactive policy to change market design in coal, our main source of commercial energy, and do away with the current monopoly role for Coal India, the dominant public sector major. 

The distorted market structure seems to hamper efficiency and productivity in operations and almost certainly jacks up overall costs, never mind that domestic coal prices remain artificially subdued for policy reasons and high-ash content, etc. 

We certainly need transparency and openness in coal. Yet, the charge in the draft CAG report that non-auction led to windfall gains for private and public sector companies, estimated at as much as Rs 10.7 lakh crore, seems far-fetched even if the purported amount is supposed to be for a 25-year mine lease period, as has been subsequently clarified. So, the earlier reports that the CAG's estimate of loss pertained to the period 2004-09 seems incorrect. 

But even when the Rs 10.7-lakh-crore loss is based on the assumption of a longer time frame, it remains questionable given the underlying market structure. It can be argued that merchant power producers, whose tariffs are market-determined, in getting coal blocks on the platter can reap huge benefits. But the risk (read, demand) for merchant power is also large and it seems unique in India that we insist that power producers also mine coal. 

The CAG's latest loss estimate for non-auction is as similarly erroneous as its 2010 estimate of Rs 1.76-lakh-crore loss to the exchequer, for the lack of competitive bidding for licences for second-generation mobile telephony, or 2G, and attendant usage of the radio-frequency spectrum. This is so because the CAG, in arriving at its 2G loss estimate, seems to have wholly ignored telecom industry structure and the synergy of networks. 

The non-auction for 2G spectrum did serve a vital policy purpose given low teledensity, and the appearance of new service providers lately brought down telecom rates to as low as half paisa per second, which, in turn, led to massive diffusion of mobile telephony complete with its myriad benefits from increased communication, business services and other efficiency gains.
However, in the process of non-auction and the administrative handing out of the newest telecom licences, the judicial reckoning is that there was impropriety and corruption involved, and former telecom minister A Raja faces trial in court. 

Yet, the fact is that licences for 2G have been issued earlier sans bidding and without courting controversy. Now, it is another matter that the auction for 3G services did garner for the government some 1 lakh crore as non-tax revenue. But value-added 3G services are quite different from basic voice and data communication in the 2-2.5G mode, and it follows that the auction revenues from 3G cannot really be presumed for 2G licences too. 

But that seems to have been the rationale for the CAG to arrive at its 2010 loss estimate, despite the strong case in terms of policy to aid the economies of networks by abjuring upfront bidding. Such a course of action for 2G did not mean lack of revenue from spectrum, allegedly made available on the cheap - far from it. As the mavens have shown, within a few years of the non-auction policy for deciding on 2G service providers, the monies from revenue share, spectrum fees, etc, added up to as much as twice the amount that would have accrued to the exchequer via bidding. 

Yet, the CAG report did wholly ignore network economies. Further, the recent Supreme Court ruling has cancelled the latest round of 122 licences for 2G services, issued when former telecom minister Raja held office. The ruling mandates in effect auctions for spectrum, and while elaborating on the history of telecom in the country, surprisingly fails to mention the fast-growing field of the economics of networks. 

More important, the apex court judgment in deciding that auctions be the sole route for spectrum allocation, indeed for allocating all natural resources, seems to completely ignore technical developments in telecom. 

Traditionally, of course, the policy of spectrum licensing was seen as essential for 'interference protection'. It meant wireless systems that got 'exclusive access' to telecom spectrum. But it is now generally accepted by the experts and regulators that such exclusive licensing is 'highly inefficient' use of spectral resources. 

Recent technical developments such as mesh networks, location technologies and spectrum sensors all allow various forms of spectral sharing. The fact of the matter is that the supposed scarcity of telecom spectrum is largely because of outdated policies and obsolete wireless technologies. 

The bottom line is that in calculating the apparent loss from non-auction, whether of coal blocks or spectrum, the CAG clearly needs to take into account the ground realities, industry structure and other related development to arrive at reasonable estimates.

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