Opinion

Unfair rules in Odisha’s mining auction

Ashok Kumar Bal | Updated on March 20, 2020 Published on March 20, 2020

The iron ore auction hurts experienced standalone miners, and favours end-users who can fork out a high revenue share

The auction of iron ore merchant mines expiring on March 31, 2020, has been successfully completed by the Odisha Government and the Letter of Intents to the successful bidders are being issued. The successful conduct of auctioning brings in focus a large number of issues.

The auctioned merchant mines were classified into two categories: captive and non-captive/open category. Only five mines were classified as captive and balance 14 mines as non-captive/open. These five captive mines accounted for around 30 per cent of the total auctioned reserves and the balance 14 mines, 70 per cent. While for a mine reserved as captive, only end-users could bid, the open category blocks could be bid by both captive as well as merchant miners. The access and option available to the end-users in bidding was not available to merchant/standalone miners.

This classification, an essential feature of the auction process, thus laid the foundation of an absence of a level-playing field where the end-users had a distinct advantage vis-à-vis the standalone miners. The lack of correspondence between the classification of mines and access of participation in the auction process is the main contributor to the present outcome of the auction process. Had the auctioned mines earlier operated by merchant miners been offered to only merchant miners, or had the classification permitted only end-users to bid for captive mines and merchant miners to bid for open category mines, the outcomes would have been somewhat different and more sensible. The auction outcome is perplexing. It has presented an unprecedented scenario of winning bids’ premium ranging from 90.9 per cent to 154 per cent. This clearly shows that for every ₹100 a bidder earns from its sale, it has to pay premium starting from ₹90.9 to as high as ₹154. A bidder in addition to the revenue-share premium, has to pay royalty, dead rent, District Mineral Foundation (DMF), National Mineral Exploration Trust (NMET) and other statutory dues of about 17 per cent. He has to incur the cost of production, salary and other operating expenses.

The results show that the successful bidder has to incur a cost by way of premium and other statutory duties/levies which is much more than what it earns. The rationale of such a model is incomprehensible. The present auction policy discriminates against the standalone miners by incentivising the end-users as they have the ability to absorb and accommodate the high cost of revenue-share and other associated cost in their value-added activities and ultimately in the price of the final product. This privilege is not available to standalone miners.

Auctions were held for total estimated iron ore resource of about 1,788 million tonnes (mt). Out of this, 527 mt was reserved for end-users and the balance 1,261 mt earmarked for open category for which captive and merchant miners could bid. The outcome reveals that of 1,261 mt reserves meant for open category, the end-users/steel-makers bagged 923 mt.

In all, nearly 81 per cent of total auctioned resources have been bagged by the end-users/steel makers leaving 19 per cent to the merchant miners. It is significant to mention that before the auction, 100 per cent of these auctioned reserves were with merchant miners which has now been reduced to 19 per cent. This structural shift reconfirms the view that captive miners have a distinct advantage vis-a-vis merchant miners.

If we further delve into the matter, it will be significant to observe that two of the erstwhile large merchant miners have either not qualified in the first round of auctions or have not been successful in competing with the exorbitant high bids in the final round. Even a large steel-maker in the captive category has not been able to win a single bid. This demonstrates an important aspect — that seasoned dominant players both in the merchant and captive categories who have participated rationally in the auction process, have found themselves left out in the game. An analysis of the merchant miners would show that barring two existing players, most of the other players are new entrants without any prior mining experience or are very small players having a negligible share in the auctioned resources.

Steel-makers gain

It is also important to observe that a steel-maker having won four leases (two captive and two end-users) will have control over 65 per cent of the total auctioned reserves. Two steel-makers with five mines will account for 75 per cent of the resources. This will show that the sector is getting polarised where few steel-makers will have dominant control over the resources and hence production, leading to a very skewed and asymmetric situation.

It is ironical that the present system of competitive bidding is leading to a distorted and polarised structure. This process will get further worsened with intermediate and small manufacturers who will gradually feel the pinch and potentially be swallowed by the large players or they will become unviable in future.

The most critical aspect of auction is the exorbitant revenue sharing premium in each case of a successful bidder. The revenue as per the tender document is calculated by multiplying the mineral dispatched during a month with the sale price declared by the Indian Bureau of Mines (IBM). The future will revolve around the IBM declared price. Currently the average price in a month of sales made by merchant miners is taken as the IBM-declared price. The spread of the consumer base and the prices at which merchant miners sell to different customers and very often different merchant miners serving to overlapping customers, has given rise to a situation where IBM declared prices are fair and transparent.

In a sense the IBM declared price is representative of the market prices except where there could be a time lag in publishing the IBM prices vis-à-vis current market prices. In the new regime where the market is dominated by few end-users, the IBM prices being vulnerable to manipulation can’t be ruled out. IBM will be at the receiving end. Like a tariff authority empowered with statutory and regulatory powers, IBM needs to be equipped and empowered to address the pricing issues in the new regime.

It is possible that IBM prices can be influenced or even suppressed by both captive or non-captive miners by selling iron ore to their sister concern and related parties by entering into schemes of arrangement. Therefore, the government has to take measures to ensure that IBM declared prices are fair, transparent and confirming to arm’s length principle, otherwise government revenue in the form of revenue sharing premium, royalty and GST will be adversely impacted.

Therefore, non-captive and non-related sales by captive or merchant miners should be the guiding principle for fixing the IBM prices. The principle that has been adopted for revenue sharing and valuation of estimated reserves in the tender document needs to be followed in its true spirit by the winning bidders during their lease terms.

After two years?

Auction policy and existing regulations provide certainty for the transition period of two years. This is as per the Mineral Laws (Amendment) Ordinance 2020 dated January 10, 2020. As per the tender document, the lessees are required to confirm to minimum 80 per cent of the average actual production of the mine for the preceding two years during the first two years of the mining lease.

The bid document is silent beyond two years and also on dispatches/sales of the production quantities. For avoiding any disruptive scenario and to meet the increasing requirement of iron ore, it is necessary that there should be clarity on dispatch/sales during the transition period of two years and production and corresponding dispatches beyond two years. This will avoid a situation where the lessees resort to decreased production after the two-year period and also during the first two years when they comply with the production requirement without any obligations of sales. These aspects need to be addressed at the time of approval of mining plan of new lessees, which will be effective after the initial two-year period.

 

The writer is a former IRS official

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Published on March 20, 2020
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