Coal quandary

Coal quandary

Dirty picture

Fate of 218 coal blocks in limbo; Centre seeks to cancel mines yet to be developed

ON SEPTEMBER 9, the Supreme Court reserved its judgement on the fate of the 218 coal blocks it had declared illegal a fortnight ago.

On August 25, the court pulled up the Centre and declared all allocations between 1993 and 2010 illegal. The “common good and public interest have suffered heavily” because of arbitrary allocation of these coal blocks to private and government companies, said Chief Justice R M Lodha. The apex court was hearing a slew of public interest petitions that contested coal block allocations based on the 2012 report of the Comptroller and Auditor General (CAG) of India, which suggests that illegal allocations of coal blocks to mining companies have caused losses to the tune of Rs 1.86 lakh crore to the exchequer. The court had also held the government responsible for granting largesse to private companies. As many as 106, or about 50 per cent of the coal blocks, have been leased out to private companies. The ruling on August 25 had landed the ruling BharatiyaJanata Party (BJP) in a sticky situation. Just a few months ago the BJP had campaigned against the previous United Progressive Alliance (UPA) government wielding the CAG report. But 39 of the 218 coal block allocations declared illegal, were allocated during the regime of the BJP-led National Democratic Alliance (NDA) between 1998 and 2004 (see ‘Political anatomy of a mega scam’).

On September 9, Union Coal Secretary Akhouri Sanjay Sahay told the court that the government is ready to begin on a “clean slate” with speedy and “transparent” auctioning of the coal blocks because the priority is to deal with the “looming power crisis” in the country. The Ministry of Coal stated that it did not want to form any committee to look into allocations and favoured cancellation of all the coal blocks, except 46.

Political anatomy of a mega scam   Both the Congress- and BJP-led governments at the Centre bent rules to allocate coal blocks to companies     Fall of a national asset From nationalisation to privatisation   1957 Mines and Minerals (Development and Regulation) (MMDR) Act came into being; it placed mines and minerals under the control of the Centre but allowed it to only develop and regulate the mines 1973 Coal Mines Nationalisation (CMN) Act enacted; 711 coal mines were nationalised whose development was vested in the Centre; the rest continued to be operated by private companies 1976 CMN Act amended; mining leases with private lease holders terminated except for iron and steel who were allowed mining for captive use Oct, 1991 The Planning Commission proposed the entry of private entities to develop coal and lignite mines as captive units of power projects Jan, 1992 Cabinet approval sought for allowing private sector participation in captive coal mining operations for power generation and other end uses to be notified from time to time Jul, 1992 Coal ministry set up Screening Committee to implement provisions of captive mining as per the 1976 amendment clauses May, 1993 CMN Act amended to allow private sector participation in coal mining for captive use for purpose of power generation as well as for other captive end uses to be notified from time to time. Coal washery was also included as end use Mar, 1996 Cement included as an end use sector Mar, 1999 NDA government led by BJP allowed captive coal mining companies to sell coal in the open market to keep the surplus stock away from fire 2001 New State Mining Policy came into being; allowed state agencies to mine commercially May, 2003 Electricity Act 2003 brought about electricity reforms but created open and short-term markets for power trading. With no long-term power purchase agreements with distribution companies in place despite coal allocations since 1993, many captive power producers switched to trading in these power exchanges, which led to high tariff Jul, 2004 Idea of competitive bidding to ensure transparency in coal block allocation was proposed Sept, 2010 MMDR Act amended to allow the Centre to set the terms and conditions for the selection of a company through competitive bidding Feb, 2012 Auction by Competitive Bidding of Coal Mines Rules introduced Aug, 2012 CAG report on Performance Audit of Allocation of Coal Blocks and Augmentation of Coal Production tabled in Parliament Aug 25, 2014 Supreme Court declared coal block allocation process between 1993 and 2010 illegal Sept 9, 2014 The court reserved its judgement

Attorney General of India Mukul Rohatgi had sought exemption for these 46 coal blocks—19 were allocated during the NDA regime—from possible revocation of licences on September 1, saying 40 are under production and mining is about to begin in the rest. These coal blocks are with big-ticket private power and steel companies and are estimated to produce 53 million tonnes of coal this year. This is 10 per cent of the total projected output from all the 105 coal blocks with private companies and is sufficient to generate 26,000 MW of electricity and produce 12 million tonnes of steel.

Representing Indian Power Producers’ Association, senior lawyer Harish Salve told the court that individual cases must be considered by a three-member panel comprising a retired Supreme Court judge and an auditor. Rohtagi opposed the idea, saying it will delay coal block allocation. If the Supreme Court cancels all the coal blocks, he said, the government mining company Coal India Ltd should be allowed to take over active mines, or companies be allowed to continue production until the blocks are re-auctioned to ensure supply to power plants.

Prashant Bhushan, a Supreme Court lawyer representing non-profit Common Cause, a petitioner in the coal allocation scam case, says, “For all the noise made by the government, production of coal from the post-1993 allocations is only 7 per cent of the total coal demand in the economy, which is about 739 million tonnes.”

While declaring the coal blocks illegal, the court based its judgement on the presidential reference related to the allocation scam of another natural resource—2G spectrum. In 2012, it cancelled all 122 spectrum licences on the ground of arbitrariness, saying alienation or allocation of natural resources should rely on principles of equality as enshrined under Article 14 of the Constitution, else such executive decisions are arbitrary or capricious (see ‘Behind the blocks’).

Sanctioned, illegally

More than 65 per cent of the country’s total electricity requirement is met from coal, a non-renewable reserve. Industries like iron, steel and cement also depend on coal as fuel. To ensure equitable distribution of this vital yet limited resource, the government in the 1970s nationalised coal reserves, except a few blocks being mined by iron and steel companies. It also set up the Coal India Ltd (CIL) as the sole authority to develop the reserves and sell the mineral to companies, both public and private. In the 1990s, following economic liberalisation, there was a surge in the demand for coal. So in 1993, the Centre amended the Coal Mines Nationalisation Act, 1976, and allowed private players to develop coal blocks. This is when irregularities started creeping in.

The court has identified two major irregularities in the way coal blocks were allocated. In 1993, the government allowed the Screening Committee, an inter-ministerial body, to award coal blocks to private players. But in the absence of clearly defined evaluation criteria, the committee followed an “ad hoc and casual” policy that was neither consistent nor transparent, the court said. The exercise of allocation denied a level playing field, healthy competition and equitable treatment. This whimsical procedure of allocation had resulted in “unfair distribution of national wealth” to a few private companies, read the judgement (see ‘How Screening Committee allocated coal blocks’).

The apex court has also questioned the authority of the Centre in allocating coal blocks.

The governments of Odisha and Maharashtra, in their submissions to the court, have argued that they have “virtually non-existent” role as the Screening Committee allocates coal blocks without taking their recommendations into consideration. For instance, the committee awarded Kosar Dongergaon coal block in Maharashtra to Chaman Metallics Ltd even though the state government had not recommended it. This contravenes provisions of both the Mines and Minerals Development and Regulation (MMDR) Act, 1957, and the Coal Mines Nationalisation Act, which say that the Centre has the power only to regulate and develop mines and that the leasing process largely stays with the state government. “The allocation letter by the Central government leaves practically nothing for the state government to decide, except to carry out the formality of processing the application and for execution of the lease deed with the beneficiary selected by the Centre,” said the court.

The other irregularity crept in 2001 when the coal ministry introduced New State Coal Mining Policy. The policy allows state government corporations to mine anywhere in the country at a commercial scale to meet the demand of small industries that cannot be catered to by CIL. The apex court has said the policy has “no legal sanction”, however laudable the objective may be, because it violates the Coal Mines Nationalisation Act that prohibits commercial mining by state corporations and restricts transportation of coal by the railways, ensuring that the mined coal is used by industries in isolated pockets.

Sitting idle on black gold

Companies once allocated a coal block are supposed to develop it within the stipulated time period of 42 weeks (for open-caste mining) and 54 weeks for underground mining.But so far, only 46 have been able to develop the mines and another 80 coal blocks have been deallocated as they could not start production within the stipulated time frame. Some of these blocks were allocated more than 14 years ago. Former power secretary E A S Sharma alleges that there was an orchestrated move to benefit some influential private companies so that they can exploit land and coal resources with the help of public money raised by public sector banks. Almost all public sector banks have given big loans to power companies that have bagged coal blocks (see ‘Banks under burden’). This is the reason stocks of several banks tanked shortly after the court termed the coal blocks illegal. Sharma, in a letter to the Reserve Bank of India early this year, says, “There is an impending financial crisis in PSU banks which granted loans to developers of dubious power projects and questionable captive coal blocks.”

According to an estimate by Karvy Stock Broking, wealth management firm in Gurgaon, loans make up a major chunk of the amount power developers have invested in exploring, mining and setting up projects. Since 2006, Indian banks have lent Rs 2.6 lakh crore to iron and steel companies and Rs 5 lakh crore to power companies. While not all of these loans will be at risk, a back-of-the-envelope calculation shows that exposure to the companies with captive coal blocks could be between Rs 2.5 lakh crore and Rs 3.5 lakh crore.

“If these projects fail to take off, banks will have to either write off or classify them as non-performing assets. Even if the court asks the government to reallocate these coal blocks, it would mean substantial delays and would result in slippages and restructuring of loans,” says an analyst with Karvy Stock Broking.

Some projects are already in a fix. A consortium of banks comprising Axis Bank, Punjab National Bank and UCO Bank are trying to find buyers for debt-ridden Corporate Power Ltd (CPL) of Nagpur-based Abhijeet Group, which was allotted five coal blocks but is yet to start production from any of the blocks. In August, the chairperson and managing director of Syndicate Bank, Sudhir Kumar Jain, was arrested for accepting bribe from Chhattisgarh-based Bhushan Steel, implicated in coal allocation scam. The company wanted a loan of Rs 100 crore from the bank. The CBI, which has issued arrest warrant against Bhshan Steel’s managing director Neeraj Singhal for bribing Jain, says the company has taken loans of Rs 40,000 crore from 51 banks. The coal ministry has also issued a showcause notice to Bhushan Steel for not being able to develop four coal blocks allotted to it between 2003 and 2008. Bhushan is yet to file a response.

Companies often cite green clearances as a reason they have not been able to develop mines. An analysis by Down To Earth shows some companies are yet to apply for clearances, while in several other cases, coal blocks are located in areas with dense forest cover where community rights are yet to be settled. Consider this. In 2006, power company Essar and aluminium producer Hindalco were allowed to develop Mahan coal block in Singrauli. The communities challenged the clearances granted to the companies, saying that their rights over Mahan have not been recognised.

Hopes of cheap power dashed

Though many coal blocks could not be developed within the stipulated time period, the coal ministry kept allocating reserves, mostly to power firms. Between 1993 and 2010, as many as 83 coal blocks were leased out to power companies. This excludes coal blocks allocated for ultra mega power projects (UMPPs) that have been exempted from the case by the Supreme Court. In 2006, the government dereserved another 81 coal blocks with CIL and awarded them to private firms, including power and other infrastructure companies. This was to bridge the gap between demand and domestic supply of coal and to stabilise electricity price, says the coal ministry. But its objective is nowhere closer to being achieved.

In 1999, the NDA government had decided to allow the sale of coal from captive mines saying that surplus coal was hazardous to keep in plant. It intimated its decision through a letter to ASSOCHAM, Sponge Iron Association, FICCI and CII. This gave elbow room to private players, who instead of producing electricity for the grid, started selling coal in the open market.

“Between 2009 and 2012, the coal ministry allowed Tata Steel, Jindal Steel & Power Ltd, Integrated Coal Mining Ltd, Sarda Energy Minerals Ltd and Electrosteel Castings Ltd to sell coal in the market,” says Sudiep Srivastava, a lawyer in Chhattisgarh and petitioner in the coal scam case.

Some independent power producers also procured the surplus coal from captive mines at a cheaper rate and generated electricity to sell it at a whopping Rs 10 to Rs 12 per unit in the short-term open markets such as power exchanges while generation cost did not surpass Rs 2.50 per unit. Power manufacturers are supposed to enter into long-term agreements with power distribution companies (discoms) which brings stability in electricity prices. Captive power producers also sold electricity in these exchanges and charged arbitrary prices, which effectively increased electricity bills for consumers.

Interestingly, the Centre rolled out two policies to facilitate sale of electricity leading to creation of short-term power market. The Electricity Act of 2003, passed by NDA, allowed private players to trade electricity. Then in 2005, the UPA formulated the National Electricity Policy (NEP) which called for creation of power exchanges for power trading. “It was only in 2012, 16 years after coal blocks began to be allocated to private firms, that the companies were asked to participate in power procurement bids called by discoms or their authorised state agencies and enter into long-term power purchase agreement,” says Kalyan Banerjee, Trinamool Congress MP, who led Parliamentary Standing Committee of Coal. Since the entire process of allocation was unauthorised, no one should enjoy the benefit of allocation, said Banerjee, recommending that all the coal blocks allocated to private power companies should be scrapped.

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How to govern natural wealth

Allocation process must strike a balance between economic growth and environmental and social concerns

Allocation of natural resources in a fair and transparent manner has been a tricky business for the government. Even before the Supreme Court declared the 218 coal block allocations “illegal”, because of the “arbitrariness” and “inefficiency” in allocation to private and public sector companies, two botched cases of resource allocations were etched in public memory.

In 2008, the Supreme Court quashed all the 122 licences for 2G telecom spectrum issued by UPA government on a first-come-first-served basis. The licences, which favoured a few private telecom players, had cost Rs 1.76 lakh crore to the state exchequer, according to the CAG report.

The apex court is also hearing a case related to the gas field allocation and pricing of natural gas. In 1999, after the Centre introduced the New Exploration Licensing Policy, allowing private players to enter the field of exploration and production of gas and oil, Reliance Industries bagged the contract for D6 block with 7,645 sq km area in Krishna-Godavari (KG) basin for exploration and production of gas and oil. But Reliance violated its supply contract, forced the government to hike gas price in its favour and drastically reduced and delayed the profit share of the government, highlights the 2011 CAG report on Performance Audit of Hydrocarbon Production Sharing Contracts. “Natural resources belong to the people, and the state government is the custodian of natural resources. However, allocation of the D6 block to Reliance in KG basin has violated the interests of the state and its people,” notes a public interest petition against Reliance.

As of now, the country seems to be nowhere near resolving the growing debate on what is the best way to allocate natural resources, which ranges from minerals to coal to airwaves. The only attempt made to resolve the issue so far was in 2011 when the government set up a committee under Finance Secretary Ashok Chawla to suggest a roadmap for enhancing “transparency, efficiency and sustainability in the allocation, pricing and utilisation of natural resources”. A major recommendation of the Chawla Committee was to introduce market-based competitive bidding to ensure transparency (see ‘Codes of conduct’).

The idea was not new. It was first floated in 2004 by the then secretary of the coal ministry. But states opposed bidding. The then chief minister of Rajasthan,Vasundhara Raje Scindia, wrote to then prime minister Manmohan Singh citing Sarkaria Commission’s recommendation, which said states should have the autonomy to allocate natural resources. Chhattisgarh’s then chief secretary K Vijayavargiya said bidding would lead to coal price rise which would in turn lead to the increase in electricity tariff. West Bengal opposed bidding and wanted states to have the authority to allocate coal blocks.

Despite oppositions, in 2012 the Centre introduced the Auction by Competitive Bidding of Coal Mines Rules. Last year 10 coal blocks were allocated through bidding. It has also ordered auction for granting fresh licences for the 2G spectrum. But is bidding the best way to allocate natural resources?

Auction with caution

Several countries follow bidding mechanism for allocating natural resources for two reasons. One, it generates higher revenues for the government in a short duration; and two, it increases transparency.

However, bidding has an inherent caveat. “There is a risk of subjectivity and discrimination in the evaluation process (of mining proposals) if proper conditions of bidding are not allowed,” says S Vijay Kumar, former secretary of the Ministry of Mines and a member of the Chawla Committee.

Experiences from other parts of the world support Kumar’s opinion. In a 2013 report, Australian think tank Independent Commission Against Corruption pointed out that if not structured properly, the criteria for selecting and evaluating companies through bidding can be discretionary. During the mining boom in Australia, many companies participated in bidding by promising public benefits in future, which they never delivered, notes the report.

Besides, says Kumar, one needs to have sufficient information about a natural reserve, say a coal block, in hand before bidding for it. This can be obtained only through proper exploration, he adds. A 2011 World Bank report on mineral resources also suggests that gathering sufficient geological data is important before commencing bidding. The other safeguard that the report suggests is to conduct separate technical and financial evaluations. Social safeguards should be clearly specified in the bidding proposal and form a basis for evaluation, it says. The UN’s Sustainable Development Solutions Network in its 2013 report also emphasises the optimisation of exploration of natural resources.

Many countries that allocate natural resources through bidding carry out detailed exploration beforehand. In Democratic Republic of Congo, auctioning is done only after a deposit has been examined by the state authorities and is considered to be an asset of substantial value. In Zambia, auctioning is done only for areas that are known to hold mineral resources.

“However, exploration of natural resources is not done in a comprehensive manner in India,” says Ganpat S Roonwal, mining expert and former head of the geology department at the University of Delhi. This raises questions on the effectiveness of bidding.

Is CIL an option?

Natural resources belong to people and they have to be the beneficiaries. To ensure fair allocation of coal, petitioners of the case, demand that all coal blocks declared illegal by the court should be returned to the Coal India Ltd. But not all agree with the suggestion.

The country’s targeted GDP growth of about 10 per cent banks largely on industries that heavily depend on coal. In 2013-14, the country produced 565.64 million tonnes of coal. Given the country’s growing energy demand, coal requirement is likely to double by 2017, according to the 12th Five-Year Plan. “In such a situation it is unlikely that private parties can be taken out from the equation,” says Roonwal. In 1993, the Coal Mines Nationalisation Act allowed private companies to develop coal blocks as CIL was unable to meet the growing demand. “So one needs to ensure that coal is properly allocated and utilised with regulations and technologies in place,” he says. This is applicable to all natural resources, he adds.

Regulate, not negotiate

Allocation of natural resource is not just an economic consideration. “The best practices are the ones that are transparent, safeguard the rights of affected people and have minimal impact on the environment and society,” says Roonwal. India must follow these practices as a majority of its resources lie underneath the forests. Since 2007, about 45,000 hectares of forest—57 per cent of the total forest diverted for mining during the period—were razed to give way to 157 coal mining projects, shows an analysis by the Centre for Science and Environment (CSE), an advocacy organisation in Delhi (see ‘Forest cover in major coalfields’).

Open-cast mining also leaves deep scars on the earth surface. An estimate by CSE shows that there are at least 240 abandoned coal mines across the country. Few companies restore the mined area to reduce environmental impact. The burning coalfields of Jharia in Jharkhand are glaring example of the poor performance of mining companies.

Roonwal, who has also served as an expert member in the Union Ministry of Environment and Forests’ (MoEF’s) advisory committee on coal mining, says underground mining is a feasible option for large-scale mining. The industry thinks underground mining is an expensive method. But the fact is it does not involve externalities such as loss of forestland, displacement of people and pollution hazards.

Worst part of mining is that communities lose their traditional dwelling as well as livelihood. MoEF information shows that since 2007, over 720,000 people have been displaced by coal mining activities. Ground realities suggest that the actual number of people displaced is much more. About 90 per cent of India’s coal is found in tribal areas where 50 per cent of the population lives below the poverty line. Taking cognisance of the problem, the Supreme Court in 1997 ruled that private leases for mining would not be allowed in Schedule V areas (tribal areas). The judgement, known as Samata judgement, followed the petition of tribal activists who contended land acquisition by private companies in Nimalapedu village of Andhra Pradesh for calcite mining. However, the court had said if the state allows mining in such areas, benefits of mining should be shared with the affected community. “At least 20 per cent of the net profit should be set aside as a permanent fund for community use,” says the judgement.

Since mining may affect communities in other areas as well, profit-sharing should not be restricted to tribal areas. The draft Mines and Minerals (Development and Regulation) (MMDR) Bill, 2011, which lapsed early this year, had a provision of sharing profit with all affected communities. As per the provision, a mine lease holder must pay annually to the District Mineral Foundation 26 per cent of its profit-after-tax in the case of coal and lignite (and an amount equivalent to 100 per cent royalty in case of major minerals such as iron ore), as a profit-sharing mechanism. Now that the government plans to amend the MMDR Act, 1957, it should include the mechanism in the amended Act. This will go a long way in ensuring principles of equality as enshrined under Article 14 of the Constitution and reducing poverty in the mining regions of the country.

“The MMDR Act 1957 was enacted at a time when public sector was dominant,” says Chandra Bhushan, deputy director general of CSE. “Though the Act has been amended a few times, it still suffers from non-transparency in terms of mine allocation and vague provisions for mineral conservation,” says Bhushan.

The Act, following the 2010 amendment, specifies that the Centre can auction natural reserves. The state government shall then grant the required permits, including reconnaissance permit, prospecting licence or mining lease, to the company. Instead of resolving, the amendment has intensified the debate about who governs these reserves and does not address the contention of state governments regarding their “virtually non-existent” role once a beneficiary has been identified by the Centre. The MMDR Act thus needs to clearly specify the role of the Centre and the state.

Integrate green clearances

Several coal blocks, though allocated years ago, are yet to begin production. In most cases, the companies delay production on the pretext that they are yet to obtain environmental and forest clearances. If prior environmental clearances are integrated in the allocation process, disputes in the post-allocation phase could be minimised. The Chawla Committe in its report had recommended that companies should obtain a certain level of clearance, for instance preliminary forest clearance, before bidding for an explored block. This will fast-track production and ensure that coal blocks are allocated in a more environmentally and socially responsible manner.

This is important as the country’s coal reserves are depleting at a fast rate. According to Coal Mine Planning and Design Institute Ltd headquartered in Ranchi, CIL is now left with 18 billion tonnes of coal. If mined at the current rate the reserves would last 17 years.

This will force the country to import coal for generating power and other industrial use. This is not a viable option. Power utilities are already expected to import around 159 million tonnes to meet their requirement, according to the 12th plan report. Another 54 million tonnes of coal is likely to be imported by thermal power stations designed to use imported coal. More dependence on imported coal to generate power will only push the electricity price northwards and lead to increasing power shortage. The government must remember this before framing regulatory mechanism to govern the national asset.