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Saturday, 24 March 2012 00:00
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Power firms benefit, but nowhere near what CAG says

Given instances of electricity producers selling power at R3-4 per unit (R5.5 in earlier years!) after extracting the amount of coal required at around 40 paise from captive coal mines, it’s hardly surprising the CAG should be coming out with a report that says captive coal blocks handed out between 2004 and 2009 have resulted in undue benefits of R10.7 lakh crore to firms. That around 60% of them are PSUs mitigates the favouritism, but doesn’t do away with it. While a solution needs to be found to fix the problem, it is important to have a perspective on the size of the scam.

The CAG report itself is not out, but leaks based on a draft report suggest the CAG has multiplied the profits the public sector Coal India Ltd (CIL) makes per tonne of coal (R325 or so) by the amount of coal reserves handed out to firms (33 billion tonnes). Since the extraction is to take place over 20-40 years and not in one year, not discounting the revenue stream hugely exaggerates the benefit. Two, the CAG assumes erroneously that all 33 billion tonnes of reserves can be extracted. You need details of each mine to come to a precise figure, but of the 276 billion tonnes of coal reserves the coal ministry says India has, it says just 110 billion is ‘proven’ (around half of this is with CIL). Of the 52.5 billion tonnes of ‘proven’ reserves with CIL (another 11.2 billion is ‘indicated’ and ‘inferred’), its draft red herring prospectus says, only 21.7 billion tonnes is extractable. Apply the same ratios to the 33 billion tonnes of reserves the CAG talks of, and you get a figure of 8-9 billion tonnes that is extractable, or a fourth of what newspapers quote the CAG as talking of—the CAG, for the record, has said the figures cited are from an earlier draft and have not been finalised.

Another way to estimate the scam is to look at similar deals, which is what the CAG did in the case of telecom—it looked at Unitech-Telenor, Swan-Etisalat and 3G auctions and cited all figures to arrive at estimates of the benefit Raja conferred. If you look at Tata Power’s Bumi purchase in 2007, you arrive at a figure of R2 lakh crore. If you look at the Lanco deal, you come to a R5 lakh crore benefit, or half of what the CAG says. If you look at CIL’s market cap of R2.1 lakh crore and its 52.5 billion tonne ‘proven’ reserves, you come to a loss of R1.3 lakh crore (in each case, that’s assuming all 33 billion tonnes of coal are extractable).

But whether the scam is R10.7 lakh crore or a tenth that, it’s important to fix it since, as more captive blocks get given out, it will keep rising. A good solution, if the government is still averse to auctions and selling to merchant miners, is to get power producers to bid for projects only on their capital costs. The winning firm can then be allocated a coal block for purposes of the power project, and the lower coal costs will be passed on to consumers. Any other method, including allocating captive coal blocks to firms on the condition they have to bid for power projects later, is conferring an unfair advantage and asking for trouble.



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