Core issues in the coal scam

Alok Ray | Updated on August 27, 2012

That the coal blocks allocated were not mined was one of the worst aspects of coalgate.

The allocation of captive coal blocks without open bidding during 2004-09 has caused the national exchequer a colossal loss of Rs 1.86 lakh crore (bigger than the 2G loss), according to an estimate by the Comptroller and Auditor General (CAG). What are the major issues in coalgate?

After coal nationalisation in 1973, public sector Coal India Limited (CIL) was accorded sole rights to extract coal. But CIL has been failing to supply coal in the required quantities to end-users (particularly in the power, steel, aluminum and cement sectors). This has emerged as a major constraint on India’s growth.

Hence, to augment production of coal, UPA-I government decided to go for allocation of some coal blocks to a few major end-users in the public (like NTPC) and private sectors (such as Arcelor-Mittal, Tata Steel, Reliance Power, Jindal Steel) for captive use (that is, no outside sale permitted), starting 2004.

However, instead of competitive bidding, the government went for selective allocation by a ‘screening committee’, largely comprising government officials, on the basis of recommendations by various ministries and State governments.


The CAG considers this method of allocation ‘non-transparent’, as it provides exclusive access to coal blocks to only a few favoured parties. According to the CAG, competitive auction of coal could have fetched an additional Rs 1.86 lakh crore of revenue to the government. Thus, the nation lost and the favored private players gained that amount.

The opposition parties allege corruption on the part of the government in choosing this method of allocation. The government, on the other hand, argues that the Coal Nationalisation Act does not leave any scope for open bidding for commercial purposes by private parties.

Without the Act being amended, only captive allocation is possible, it argues.

But the Act could not be modified in the face of strong opposition from the Left parties and trade unions. The legal position on whether open bidding for captive allocation was permissible under the Act was not clear in 2004.

Moreover, several States, including States ruled by non-Congress parties (like Chattisgarh, Orissa, West Bengal) objected to open competitive bidding, as that would deprive them the right to favour some selected companies (in both public and private sectors). Hence, the government went for the next best solution permitted under the existing laws, though the PM made clear his preference for competitive bidding. Subsequently in 2006, the Law Ministry opined that competitive bidding was possible after a simple administrative notification.

So, the question remains: why did it take so long, despite the PM’s expressed preference in 2004 and Law Ministry’s clearance in 2006, to finally switch to competitive bidding in 2010? Was it simply due to the time-consuming nature of the inter-ministerial consultative process, or a deliberate delay in order to enable politicians and officials to prolong the benefits of discretionary power?

Apart from the non-transparent discretionary allocation (and the consequent ‘notional’ revenue loss to the government), an even bigger problem was that no coal production had started from most of the allocated captive coal blocks, even by the end of 2011-12.

The basic purpose of captive allocation was defeated. On the other hand, while the favoured parties sat on the blocks, their share prices and market capitalisation immediately increased as a result of the acquisition of these valuable resources. In this respect, the loss from coal block allocation was even worse than that from 2G allocation.


In the case of discretionary 2G allocation at less than market prices, at least some of the benefits were passed to the final consumers in the form of more competition and lower call charges. But that was not the case with unused coal blocks, which did not increase availability, or lower the price of coal or power or steel.

Why did production not start? A blame game is underway. The companies are blaming State governments for not providing environmental and other clearances. Others say that these companies secured the coal and shut out competition, and then decided to wait for a situation when the extraction and use of coal would be even more profitable. Though there were clauses that the coal blocks would have to be returned if production deadlines were not met, the government did not try to enforce the clauses.

The method of calculation of national loss by CAG has been criticised by analysts on several grounds, such as: simply adding up losses over a 25-year period without discounting, using the much higher price of coal in 2011-12 after the global commodity boom while the allocation was done much earlier, and not subtracting the additional revenue that the government should have got from corporate taxes on the additional profits of the favored parties as a result of the allocation.

The CAG revised its figures on several occasions in response to criticisms, which indicates sloppy accounting and so on. But whatever the ‘true’ estimate, there is no doubt that a substantial national loss has taken place and CAG has done a service by bringing it up.

The Opposition’s tactics in Parliament in this connection are questionable. By only insisting on the PM’s (who was also the Minister-in-charge of coal at that time) resignation, and not allowing a full debate to take place on the floor of the House, the nation has been deprived of knowledge of the full facts. Let there be questions and answers in Parliament, which would enable people to know the truth.


Finally, some good may come out of this mess. Given CIL’s inefficiency to meet the rising demand for coal, forcing the country to use expensive, imported coal, the only solution is to allow private players in the business of extraction of coal, along with CIL.

India has one of the largest reserves of coal in the world. Apart from increasing production, the new competition should improve the efficiency of CIL itself. The allocation of all coal blocks (including captive mines) must be through open, transparent, competitive bidding.

There are indications that the BJP is prepared go along with the Congress in amending the Coal Nationalisation Act. In fact, the BJP (and NDA) was the first to suggest that this should be done, though they could not do it while they were in power.

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Published on August 27, 2012
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