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Govt appoints consultant to examine coal linkage auctions

The government has asked SBI Capital Markets Ltd to evaluate whether coal linkages, through which projects get assured supply of the fuel at a discounted price, can be auctioned in an attempt to make the process of allotting the scarce natural resource to companies transparent. Buoyed by the success of the coal block auctions, the Bharatiya Janata Party (BJP)-led government is considering a plan to adopt a similar model for old and new coal linkages. Linkages are awarded to projects that do not have captive coal mines and need to source coal commercially from state-owned Coal India Ltd (CIL). “Even coal linkages have been done arbitrarily and were given in a subjective manner. The idea is now to study all the linkages that have been given and evaluate whether they and all future such linkages can be bid out in a similar transparent manner as the coal blocks,” said a senior government official, requesting anonymity. The plan to auction linkages follows reports of irregularities in granting coal linkages. To take advantage of the discounted price offered by CIL, developers of power plants had made false claims regarding the order of equipment, financial status, land acquisition and water supply, Mint had reported on 18 September 2012. Several firms assured of coal supply claimed to have placed orders for power generation equipment with manufacturers to strengthen their case—only, these were not really orders. Piyush Goyal, minister for coal, power, and new and renewable energy, said: “We have an open government looking at improving past practices. A team is studying the system of granting coal linkages. Once they come up with their recommendations, we will decide on the same. We haven’t made up our mind yet.” In response to a direct query on the past linkages awarded, Goyal said the team will recommend a course of action. “Our Prime Minister is a decisive leader who believes in time-bound execution,” said Goyal, ascribing the success of coal block auctions to “courage of conviction, sincerity of purpose and decisive leadership of the Prime Minister Mr Narendra Modi”. Earlier, power projects were directly awarded coal linkages. However, scarce resources and an increasing number of applicants prompted the government to introduce a system of awarding letters of assurance that required approval by the standing linkage committee, a panel headed by a representative of the coal ministry and comprising representatives from the Planning Commission, ministries of power, shipping and railways, the Central Electricity Authority, the Central Mine Planning and Design Institute and CIL. These letters were converted to linkages after a project completed its financial closure. Later, these linkages were converted into fuel supply agreements, a legally binding document that requires CIL to supply the quantum of coal agreed upon. This conversion is usually done after the project meets certain milestones in around two years. The process of selecting companies that were assured coal supply was as subjective as the process for allotting captive coal blocks and also involved factoring in recommendations from central ministries and state governments. Later, a points system was introduced for linkages for projects during the 12th Plan period (2012-17). States were happy to provide letters assuring water supply (a key requirement) to power plant developers, which signed in-principle agreements to set up projects. Queries emailed to an SBI Capital Markets spokesperson on Saturday evening remained unanswered at the time of going to press. CIL has assured supply to around 172 power projects through so-called letters of assurance. The generating capacity involved is 108,878 megawatts (MW). The number doesn’t include assurances for projects commissioned before March 2009. To be sure, CIL has been unable to meet its commitments. “The template for resource allocation has set up by the coal block auctions,” said the government official cited above. India has targeted to produce 630.25 million tonnes (mt) of coal in the current financial year and a billion tonnes by 2019. CIL, the world’s largest coal miner, is struggling to meet rising demand for the fuel. While India’s power generation capacity grew 60% over the last five years, coal production only expanded around 6%. Production was 557 mt in 2012-13 and 564 mt in 2013-14. While a minuscule amount is auctioned electronically, the balance is supplied through linkages. “Any industry which has market pricing mechanism such as cement, steel, etc., should follow the same philosophy such as the coal block auctions and follow competitive bidding to arrive at the coal linkage price,” said Debasish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India Pvt. Ltd. “Till 10 years back, the demand-supply situation in coal was not as bad as it is today. It’s only in the last decade that CIL couldn’t match up to the increase in demand for coal, resulting in the access to commodity inside India becoming a challenge and the decision makers used their discretion to allocate on some bases the coal linkages,” added Mishra. The two rounds of coal block auctions have fetched the government Rs.2.09 trillion from 33 blocks, giving credence to the national auditor’s claims that allocation of mines over the years had caused substantial losses to the national exchequer. In addition, electricity consumers will get a tariff benefit of Rs.96,971 crore. “The coal block auctions have been a phenomenal success and prove beyond reproach that if the bureaucracy is empowered and given a clear mandate, things can work in this country,” said the government official cited above. Prime Minister Narendra Modi has used the successful coal auction numbers to criticize the former Congress party-led United Progressive Alliance government, giving credibility to a Comptroller and Auditor General (CAG) report in 2012 that found that awarding the mines without an auction may have cost the exchequer Rs.1.86 trillion. The auctions are to end the uncertainty that unfolded in August when the Supreme Court cancelled 204 coal-mining permits awarded to companies, terming their allotment arbitrary and illegal. The court cancelled the licences after the CAG report. The government aims to auction or allot 110 coal mines. Of these, 65 will be auctioned and 45 allotted to state-owned firms in a process to be completed before the end of the current fiscal year. The 110 mines up for grabs have around 350 mt of reserves. Of these, 42 blocks with a production capacity of 90 mt are operational.


source: http://www.livemint.com