Ourview | Government in a coal pit

The Comptroller and Auditor General’s (CAG) final report on coal blocks allocated between 2004 and 2009 has vastly whittled down the value of “undue benefits” given to the allottees, news reports indicate. The figure doing the rounds is Rs1.8 trillion, one-tenth of the earlier estimate mentioned in its draft report a few months ago.

This reduction in the “losses” by CAG bolsters the credibility of the analysis somewhat. For, the incision has been made at the right place—it no longer includes the “gains” to public sector companies.

And correctly so, since public sector companies, at best, make regulated profits on the coal burnt in their power plants to generate electricity. They have so far indicated no intention to set up merchant plants that use coal from these mines to generate power and sell it in the open spot market or participate in bids where the other participant does not have access to this scarce commodity under the same terms.

The government, however, appears to be in denial. The thrust of its argument is that nomination was the best way to accelerate the pace of coal production at the cheapest cost. As regards credibility of the process, the allocations were endorsed by a committee of senior officials with participation from state governments. It needs no reiteration that there are better ways of allocating coal and other exhaustible natural resources (auctions are one option) and the fact a committee of officials decides matters does not change this fact.

This argument resonates with the defence given to justify the “undue benefits” granted to the private sector during the course of partial deregulation of the economy following the 1991 meltdown. The Enron imbroglio in the power sector and the certain awards in the oil sector are glaring examples. The award process was faulty, to say the least.

That said, the situation in the early part of the century during the award of coal blocks was hardly alarming. There was no justification for taking suboptimal decisions that have resulted in the distribution of natural resources to the private sector virtually for free, as is the case.

Besides, given the extent of corruption scandals that have rocked the government, the absence of allegations cannot be construed as lending credibility to a process that is fundamentally flawed due to absence of competition.

And, even where there is competition the government has failed to extract the optimal rent for coal.

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