It’s a mind-boggling number — Rs 1.86 lakh crore. That’s 10 zeros after 186. And it’s got the Government cowering for cover, once again.

The Comptroller and Auditor General (CAG) — the national auditor — claims that this gargantuan figure is the gain private companies enjoyed from improper allocation of coal blocks by the Government.

If true, Coalgate, as this is being referred to by critics, will become the largest scam the country has seen, ever. The Opposition has mounted a ferocious attack and demanded the Prime Minister’s resignation. The Government has hit back and picked holes in the CAG’s calculations.

What it is

So, what is Coalgate about and how did the CAG arrive at its number? Simply put, the CAG claims that the Government’s delay — from 2004 to 2012 — in introducing competitive bidding for coal blocks resulted in massive gains to private companies. These companies were allocated coal blocks based on recommendations of screening committees.

This process, the CAG says, was not objective and transparent, and would have helped these private companies make huge gains. According to the CAG, a part of this gain could have been enjoyed by the Government if it had acted on a decision taken years earlier to introduce competitive bidding (auctions) for the blocks.

Another grouse is that, in most of these blocks, no mining has happened yet. This defeats the purpose of the allocation — the development of infrastructure using the coal. The coal blocks were allocated for captive mining to meet supply shortages of the key input in important sectors such as power and steel.

Arriving at the figure

The CAG computed the gains for private companies in 57 coal blocks. In this, it excluded blocks allocated to public sector companies and to joint ventures of public sector companies with private companies.

The auditor used the average cost of production (Rs 583.01 a tonne) and average sale price (Rs 1,028.42 a tonne) of opencast mines (where minerals are extracted from an open pit) of public sector miner Coal India in 2010-11. Then it considered Rs 150 a tonne as financing cost. This makes the net gain to the private companies Rs 295.41 a tonne. This, the auditor has then multiplied by extractable reserves of 6,282.5 million tonnes over the life of the mines. And voila! Rs 1.86 lakh crore.

Arguments, counters

With the Opposition breathing down its neck, the Government was quick to point out what it thinks are mistakes in the CAG’s report. It says that the use of average price and average cost for various coal grades is flawed.

But others point out that any financial projection has to be based on assumptions. Detractors also say that the CAG’s numbers are exaggerated since it has not discounted the computed gains to the present value. The value of a rupee received in the future is lower than what it is today, they argue. The counterargument is that discounting is not essential since the price and the cost of the coal has been held constant by the CAG over the years.

The Finance Minister explained how there was no loss if the coal was still with ‘Mother Earth’. This was a variant of the ‘zero loss’ argument put forth at the time of the 2G scam. Many lit into this statement saying that the companies did stand to make the gains as and when they extracted the coal.

There have been calls to de-allocate the blocks. But the Government is holding firm against such suggestions. The arguments seem set to continue. The ‘coal-lateral’ damage could be heavy.

(This article was published on September 1, 2012)
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