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Wednesday, April 4, 2012

Open up the coal sector

The CAG report on coal block allocations offers the perfect opportunity for the government to examine whether the public sector Coal India Limited’s (CIL) monopoly is serving any useful purpose. And since the opposition is up in arms over the coal ‘scam’, this is a good time to get them to put their money where their mouth is—it was because CIL couldn’t produce enough coal that you had the captive allocation of mines policy, so the ideal solution is to remove the shortage by repealing the Coal Mines (Nationalisation) Act, 1973, and allowing private sector players.

If anyone has any doubts as to what removing CIL’s monopoly will do, just look at how many times India’s oil/gas reserves have risen after ONGC/OIL’s monopoly was abolished. An interesting facet brought out by the CAG report, apart from the undue benefits given to firms, is that over 50% of CIL’s production is done by outside contractors—not only is CIL not able to produce enough, it cannot even exploit the mines it has and needs contractors to do this for it.
While the dominant view is that giving coal blocks to CIL will do away with the profiteering of the type the CAG details in the case of captive mines given to power sector firms, this is based on just a partial reading of facts. Even if the government is not in favour of auctioning mines, a lot of problems would get resolved by going back to the old two-part tariff bids for power projects—let companies bid for projects on the basis of their capital costs and then allocate captive mines to the winner, with the regulator monitoring costs and ensuring the lower costs of captive mines be given to consumers.

Related to this is the reason for the delay in moving to auctions despite the PMO wanting this since way back in 2004 (see today’s top column, The real coal scam). The coal secretary, who worked as a member of the Ashok Chawla committee which suggested a switch over to the auction system, was transferred out before the committee report was made public. Before the new secretary could be briefed on the report, the chairman of CIL retired and no successor has been found, one and a quarter year since then. If this isn’t bad enough, the coal secretary retires in May! In other words, even though the groundwork is now ready for coal auctions—the MMDR Act was passed in August 2010 to allow auctions for captive mines—the government still needs to get the rules in place.

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