Will rolling auction improve coal allocation?

Allocation of coal blocks has come with its own set of controversies, tainting the image of the government of the day. A conscious effort has been made to ensure that a clean system can been adopted to allocate coal blocks.

As part of this process, on March 25, the Coal Ministry said that it proposes to adopt a ‘rolling auction’ mechanism for conducting future sales. Coal is the first mineral resource where the rolling auction mechanism is being implemented. In a rolling auction, a pool of coal blocks will always remain available for bidding.

A welcome initiative, one would say, as it will bring in predictability in the process, help bidders to plan and obviate the need to bid unnecessarily aggressively.

As VR Sharma, Managing Director, Jindal Steel and Power Ltd (JSPL), puts it, “The rolling auction mechanism will open the coal economy to its full potential. India has the world’s fourth largest coal reserves, but the country imported 247.1 million tonnes (mt) of coal in 2019-20. Commercial coal mining will likely reduce India’s dependence upon imported fuel.”

But it may not be so easy, as States will play a key role in the process and any delay will lead to cost and time slippages in commissioning these mines.

At present, little is known on how exactly the mechanism will work. According to Jayanta Roy, Group Head and Senior Vice-President, ICRA Ltd, “The auction is being carried out by the government through the MSTC bidding platform. The bidding would be conducted on a forward auction mechanism, where participants would be quoting a percentage of the National Coal Index that it would be sharing with the respective State government. The bidder who quotes the highest revenue share will be awarded the coal block.

“For the upcoming second tranche of auction for the 67 commercial coal blocks, the government will be experimenting with the rolling auction mechanism for the first time. Under this new system, investors will have the option to select the mines to be included in the next tranche of auction. The unsold blocks will be available for sale from the open pool in subsequent rounds of auction. This move is expected to increase investor interest, as it gives them the option to select the blocks to be auctioned that best suits their needs,” Roy adds.

Attempts towards streamlining coal block allocations started in 2014 when the Supreme Court declared all allocations of the coal blocks made through the Screening Committee and through Government Dispensation route since 1993 as illegal and cancelled the allocation of 204 coal blocks out of the 218 (Tasra coal block allocated to Steel Authority of India Ltd, Pakri Barwadih coal block allocated to National Thermal Power Corporation, and 12 coal blocks allocated for Ultra Mega Power Projects were spared).

In the case of 42 coal blocks (37 producing and five likely to come under production), cancellation was to be effective from March 2015. The challenge to create a new system fell on Piyush Goyal, the then Minister of State for Power, Coal & New and Renewable Energy (Independent Charge).

For the management and reallocation of cancelled coal blocks, the government promulgated ‘the Coal Mines (Special Provisions) Ordinance, 2014’. This was to ensure smooth transfer of rights, title and interest in the mines along with land and other associated mining infrastructure to the new allottees to be selected through an auction or allotment to government company as the case may be.

E-auction mode

The auction of coal block was decided to be carried out via the e-auction mode. The decision regarding allotment of coal blocks to public sector companies and allocation by auction to private and public sector companies as well as earmarking of blocks for various eligible sectors was made keeping in view the contemporary requirement of the sector at the time of earmarking. Also created was a nominated authority.

Whether this attempt was fully successful is another debate. But it did set the tone.

So on March 25, when launching auctions for the second tranche of commercial coal mining, the highest number of mines on offer in a particular tranche of auction after commencement of the auction regime since 2014, the government also proposed rolling auctions.

Coal Minister Pralhad Joshi said, “With rolling auctions, we will upload a comprehensive list of mines along with key technical data and bidders can submit their preferences for the mines to be included in the next tranche of auction. This would be a continuous process and would result in expediting the auction set-up.”

But are States on board, as they play a critical role?

“The States would play a key role in the process of land acquisition, R&R (rehabilitation and resettlement), granting of statutory clearances, and signing of mining lease. Any delay by the respective State governments to award clearances can lead to cost and time slippages in commissioning these upcoming mines,” said Roy.

As far as creating greater transparency in the whole process, he said: “India’s transition to an auction-based regime to award coal mines to the private sector has not only created greater transparency in the allocation of resources, but also helped in better price discovery. The proposed rolling auction mechanism, which empowers bidders to select the blocks that would be auctioned, further enhances transparency in the allocation process.”

The government stands to gain from the higher revenue share from the auctioned blocks, he said, adding: “Commercial coal mining has the potential for large-scale job creation and reducing India’s coal imports, which lead to a sizeable $15-20 billion in annual foreign exchange outgo.”

According to Sharma, while the rolling auction mechanism will yield results, the government should consider dedicating the blocks for coal gasification purposes. “With the government opening coal mine auctions for commercial extraction, an opportunity for the domestic sponge iron industry has emerged. Players could now look to have a coal-gasified direct reduced iron (DRI) plant though investment cost would be a big constraint. We see a potential for at least 10-12 new (coal-gasification-based) DRI plants to come up across the country,” he said.

The final verdict on success of the rolling auction mechanism will be out only when there are no differences between the Centre and the States, as any delay will lead to time slippages in commissioning of these mines, as well as add to costs.

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