Coal auction, allotment revenue behind target; fetch ~57 bn in 3.5 yrs

In March 2015 the Union government declared in a press release: “India has hit a gold mine with the recently concluded auction of 29 coal mines in two phases. The public exchequer continues to swell on revenue from coal block auctions. The total proceeds from the coal mines auctions have crossed ~1.93 trillion surpassing CAG’s estimate of

~1.86 trillion losses on account of allocation of 206 captive coal blocks without auction since 1993.”

It estimated that a revenue of ~3.35 trillion would likely flow to the states through coal mines e-auctions and allotments over a period of 30 years. By this time, 67 coal mines had already been auctioned and allotted.

However, according to official estimates, the government has collected and passed on to the states only ~56.84 billion for the period February 2015-July 2018.

The backstory

In August 2014 the Supreme Court cancelled the allotment of 204 coal blocks to the private sector by previous governments, stating that it was done arbitrarily and illegally. The NDA government, which was in place by then, swiftly enacted a law, The Coal Mines (Special Provisions) Act 2015, to deal specifically with the 204 cancelled coal blocks. The law laid down rules for the auction and allotment of coal blocks. The government could decide which blocks to auction and which to allocate. Power producers and others were to bid for the auctionable coal blocks for specific enduse. The new law also allowed the government to allot coal blocks to public sector units based on specified criteria such as the applicant company’s technical capability to mine and the need for coal in the state.

Since February 2015, the Union government has offered 65 mines to companies through auction. Of the 31 coal blocks that were finally auctioned, six stand cancelled for failing to deliver against deadlines. Moreover, 58 coal blocks have been allotted to PSUs.

Behind expectations?

Data show that there is a mismatch between the flow of revenue from auctions and allotments and the claims made by the government in the past.

In the case of the auctioned mines, companies were to pay a pre-fixed sum upfront and a regular annual payout based on the volume of coal extracted as per the mining plan. This upfront payment was set at 10 per cent of the ‘intrinsic’ value of the mine, which was calculated by discounting the net of revenue generated over 30 years at a Coal Indianotified price for the particular grade of coal and the cost associated with excavating ore from similar mines. (The government has not disclosed the intrinsic value of each mine.)

In 2015 the government estimated that the 67 mines auctioned and allotted by then would earn a potential revenue of ~3.35 trillion over a period of 30 years.

Since February 2015, the Union government has offered 65 mines to companies through auction. Of the 31 coal blocks that were finally auctioned, six stand cancelled for failing to deliver against deadlines. Moreover, 58 coal blocks have been allotted to PSUs

Theoretically, on average that would mean ~112 billion of revenue annually for the states. The specific amount for each year would vary based on the upfront payments coupled with different mining plans. Hence, the average revenue from the 67 mines over three years would be ~336 billion.

However, data provided by the ministry of coal show that between February 2015 and July 2018, a total of only ~56.83 billion has been collected by the state. Out of this, ~33.53 billion has come from auctions and the rest from the allocated coal blocks. Chhattisgarh has received the maximum revenue (~21.95 billion) and Telangana the least (~440 million). Incidentally, the government has not stated what could be the ‘potential revenue’ from the 83 mines that were auctioned and allocated by August 2018.

The government had also claimed that just the first two rounds of auction (of 29 coal blocks) would see power rates come down by ~693 billion. But so far it has not put out any assessment on whether or not the benefits of cheaper coal to the power sector have been passed on to consumers by way of lower electricity tariffs.

A report of the Parliamentary Standing Committee on Coal and Steel in August 2018 noted that the production from these captive mines had not taken off as promised. “Since allocation of coal mines under provisions of the CMSP Act and Rules made thereunder, a total of 45.28 MT coal has been produced till April 2018,” the report said.

The committee found several reasons for the below-expectation revenue, including “preparation of revised mining plans for obtaining statutory clearances, modification of geographical boundaries given in the allotment letter, land acquisition, transfer and approval of mining lease and lease transfer from previous allottees” and so on.

To this, the government replied that it was taking steps to improve the situation. A high-power expert committee has been set up to revise the criteria and method by which coal blocks will be auctioned in future. Whether this boosts revenue collection and meets future targets remains to be seen.