Who benefits from Modi government’s commercial coal auctions? Not coal mining states

India is opening up commercial coal mining to the private sector after five decades. Mining rights to 40 coal mines are on offer in auctions currently underway.

The winners will have the right to mine and sell coal to any firm globally, a change from an earlier regime where only Indian companies in the steel, cement and thermal sector were allowed to mine coal for use in their own industrial units. For the first time, even foreign-owned companies will be able to bid for coal mining rights in India.

In June, announcing the auctions, Prime Minister Narendra Modi used the new coronavirus pandemic vocabulary, claiming his government was bringing coal out of “decades of lockdown”.

However, Jharkhand has raised concern over the timing of the move. Nine of the 40 coal mines being auctioned are located in the state. In a suit filed in the Supreme Court on July 3, the Jharkhand government has challenged what it calls “farcical auctions”, arguing that it stands to lose vital forest cover, its tribal communities will be displaced, and yet it hasn’t been consulted. Worse, it points out the coronavirus pandemic will dampen global participation in the auctions and keep bid prices low.

“On the one hand, the Defendant [the Central government] has opened up the mining sector to international participants purportedly to generate maximum revenue,” states the suit, “and on the other hand, it has floated the tender for auction of the coal blocks during the COVID 19 pandemic and the resultant lockdown due to which all international commercial flights have been suspended…”

Such auctions “would encourage and bring in undeserving, collusive, cartelized, restrictive trade practices”, the suit states.

Officials in the coal ministry have been anonymously quoted in news reports saying that such fears are unfounded since a large number of companies have shown interest in the auctions.

However, an analysis by Scroll.in shows regardless of the number of participants, the design of the auctions itself leaves open the possibility of low revenues for coal-mining states. This is because the floor benchmark for bidding has been set considerably lower than previous auction rounds.

In coal block auctions held between 2015 and 2018, the government had fixed Rs 150 per tonne as the floor price for forward bidding. Essentially, this was the minimum assured premium that states stood to earn from the auctions above the usual royalty.

In the current round of commercial mine auctions, the floor price has been fixed at 4% of the revenue earned by the mining company. Calculations by Scroll.in show this would result in a drop in the minimum assured premium for the states – between Rs 48 per tonne for Grade 14 and Rs 115 per tonne for Grade 7 of Indian coal, assuming an optimistic 10 point increase in the national coal index. [More on the calculations below.]

The Centre has argued that the objective of its commercial coal mining policy is to increase coal availability in the country, rather than maximise government revenues. But this does not take into account the pressures faced by coal mining states like Jharkhand, Chhattisgarh, Odisha, Madhya Pradesh, which have to deal with the social and environmental fallouts of coal mining.

In its suit, Jharkhand government says: “Law is well settled that ‘when natural resources available by the State to private persons for commercial exploitation exclusively for their individual gains, the State’s endeavor must be towards maximization of revenue return.’”

A short history of coal

India has among the largest coal reserves in the world. But the quality of its coal is poor – because of high ash content, it produces less energy and more pollution per tonne than Indonesian and Australian coal, which dominate the world market.

In 1973, the resource was nationalised, with all coal mines handed over to the government-owned Coal India Limited. As India liberalised its economy in the 1990s, the government amended the law and allowed private companies in the power, steel, cement, aluminium sectors to mine coal for captive use – that is, as raw material for their own industrial units. Since the mined coal was not meant to be sold commercially, the companies did not have to pay any royalty.

This deprived the government of mining revenue, while allowing some companies to make windfall gains by accessing coal cheaply. Worse, a discretionary allocation process spawned corruption in the sector, as companies paid bribes to government functionaries to get mining rights. In 2014, the Supreme Court held the process to be arbitrary and illegal, cancelling 214 coal block allocations.

In 2015, the Modi government passed a new law, paving the way for coal mine auctions which would allow companies to compete for a scarce natural resource through open bidding. But participation in these auctions was restricted to companies in the power, steel, cement, aluminium sectors, since coal could still be mined only for captive use.

The first round of captive coal auctions in 2015 saw widely divergent winning prices. Keen to bolster fuel security, many firms placed aggressive bids, locking themselves into high coal costs. In the years that followed, some of the winning companies turned bankrupt and the coal blocks did not come into operation. Interest in subsequent rounds of coal auctions remained tepid, with no takers for the blocks on offer.

Meanwhile, India’s coal imports rose to 242 million tonnes in 2019-’20, an increase of 3.24% from the previous financial year, even as the country expanded renewable energy.

Many have argued this gap can be bridged by opening up the coal sector to commercial mining – firms with mining expertise will be able extract the resource more efficiently and at a faster pace than power and steel companies, which do not have competence in the area.

In March this year, citing the need to raise domestic coal production, bring down imports and save foreign exchange, the Modi government amended coal mining laws. It ended the captive coal regime and cleared the path for commercial coal mining.

In June, the coal ministry announced the first round of commercial auctions, inviting bids for 41 coal blocks by August 18. One block was subsequently dropped from the list, because of environmental concerns. Now, the deadline for submitting technical bids has been extended to September 29.

Terms of the auctions

A look at the tender document for the commercial coal auctions raises some immediate questions.

For one, the government has done away with any requirement of technical expertise in the eligibility criteria. Any company can participate in the auctions, even if it has no previous mining experience. This runs contrary to one of the stated aims of the auctions: bringing technological expertise in the sector.

“The experience of block allocations for captive use... when many non-serious players acquired coal blocks which were never developed, should be a useful reminder in this regard,” the energy think-tank Prayas said in comments made to the coal ministry’s discussion paper published in January ahead of the current auctions. The think-tank said the eligibility criteria and other conditions “should ensure that only serious players participate in bidding and win mines”.

In the suit filed in Supreme Court, Jharkhand government alleged the tender document allows “inexperienced and fly by night bidders to enter the fray and encourages speculative and profiteering bidding at the cost of a valuable national asset.”

Said Tim Buckley, Director of Energy Finance Studies at the Institute for Energy Economics and Financial Analysis: “India has long sought to improve the efficiency and productivity of its mining sector. The last thing India needs now is rogue operators who will inevitably through ignorance, incompetence or wilful negligence, take short cuts with potentially severe consequences.”

Second, as Jharkhand points out in its suit, the auctions are coming in the middle of a pandemic, with the Indian economy facing an unprecedented contraction.

Electricity demand in India, which was stagnant in 2019, nosedived 17% year-on-year for the April 1-July 24 period, Buckley pointed out. “With the average coal power plant utilisation rate well below 50% in the first quarter of financial year 2021, the demand for coal overall is well down, and many of the coal power capacity expansion plans are in serious need of a rethink…,” he said.

He added: “So Covid-19 is likely to undermine the private sector interest in bidding for the rights to develop new coal mines in India.” While global majors are allowed to bid for the mines, they are unlikely to, he said, given “the global corporate and financial markets are rapidly moving away from coal”.

Net value versus revenue models

Economic conditions are likely to depress the bid offers in the coal auctions – which makes it even more important for the government to ensure the offers do not fall below a certain threshold. It can do this while setting the floor price above which bidding takes place.

In 2015, the methodology of the coal auctions were based on the “intrinsic value” of the coal block. The government arrived at a floor price by subtracting the cost of mining from the notified price of the coal in each block. The notified price is the price at which companies buy coal from the government-owned Coal India Limited.

Companies in the steel and cement sector then competed through forward bidding – that is, by placing bids higher than the floor price. The highest bidder won rights to mine the block. The process was different for coal block auctions for the power sector, which used reverse bidding based on the price at which electricity would be sold.

To avoid the bids falling below a threshold, the government set Rs 150 per tonne as the minimum floor price. This means those who won the coal blocks in 2015 were bound to pay the government a minimum premium of Rs 150 per tonne of coal.

In contrast, the methodology for commercial coal block auctions is based on a revenue sharing model. The government has fixed 4% of revenue share from the mine as the floor price above and beyond which companies would have to bid. Bids would be accepted in multiples of 0.5% of the revenue share till the percentage of revenue share is up to 10% and thereafter bids would be accepted in multiples of 0.25% of the revenue share. The company that offers the highest revenue share to the government would win mining rights to the block.

What 4% floor revenue amounts to

In the tender document for the commercial coal auctions, the Centre has provided a formula to calculate the monthly premiums that companies would have to pay the state government, over and above the standard royalty.

The premiums would be a share of the actual revenue earned by the company, or the notional revenue, whichever is higher. The concept of notional revenue appears to have been introduced to guard against the possibility of companies underreporting actual revenues by manipulating sale proceeds and invoices.

The notional revenue can be calculated using three variables:

The representative price of coal: The weighted average of all the prices at which a particular grade of coal was sold in a particular year in India, including both domestically mined coal as well as imported coal.

The current national coal index: The weighted average of the change in the price level of coal compared to a benchmark year.

The future national coal index: The weighted average of the change in the price level of coal prevalent at the time when the company begins extracting coal and becomes liable to pay royalty.

On June 4, the coal ministry released a document which listed representative prices of different grades of coal based on March 2020 prices, which it said would be used for the purpose of the first round of commercial coal auctions. The same day, it also published the current national coal index, using the year 2017-’18 as the benchmark.

Based on these two sets of numbers, and assuming a 10-point increase in the national coal index in the future, Scroll.in calculated the per tonne premium at the floor rate of 4% revenue share for different grades of coal.

Put simply, we calculated the minimum assured revenue that states would earn at the 4% floor set by the Centre at current prices.

We found that 4% of the notional price would yield premiums ranging between Rs 48 per tonne for Grade 14 to Rs 115 per tonne for Grade 7 coal. These are the grades that constitute the bulk of non-coking coal available in India. For coking coal, the premiums are higher – but at least one grade still falls below Rs 150 per tonne, the floor price in the coal auctions held so far.

Here it is worth noting that there was no floor price for the 2015 reverse bidding auctions for coal blocks for the power sector, yet the lowest winning premium in those auctions still came to Rs 202 per tonne.

Why this is a concern for states

Setting the floor revenue share as low as 4% could depress the auction revenues, said Sudiep Shrivastava, a lawyer based in Chhattisgarh, who was a litigant in the Supreme Court case that resulted in the cancellation of captive coal blocks in 2014. “It has been seen in a large number of auctions that if the floor price is kept low, the winning bids also get affected,” he said.

While the Central government has explicitly said the aim of the auctions is not revenue maximisation, Shrivastava pointed out such arguments had come up to justify captive coal mine allocations which the Supreme Court had cancelled. “Keeping the floor price unrealistically low will allow the sale of precious mineral wealth at throwaway prices,” he said.

Said Tim Buckley: “Given the massive community and environmental externalities of coal mining and use, it is entirely suboptimal for India to encourage private investment by dramatically lowering the revenue the government will receive.”

Here, it is important to point out that coal mining states have to bear the brunt of these externalities. In recent years, they have already been complaining about state royalties from coal mines remaining stagnant for six years while the clean energy cess charged by the Centre rose from Rs 50 per tonne to Rs 400 per tonne.

In a letter to the Union coal ministry last year, Odisha chief minister said: “The central government has collected about Rs 17,300 crores [from coal produced in the state] up to March 2018 whereas during this period the royalty received by the state is only about Rs 11,000 crore.” He added: “The state continues to bear the brunt of the adverse effect of coal mining on the environment beside increased strain on water resources and infrastructure coupled with the displacement of people.”

Lower revenues for states because of a lower floor benchmark set by the Centre for commercial coal mine auctions will exacerbate this faultline.

In the suit filed in the Supreme Court, Jharkhand government has argued that “coal is one of the most important known sources of energy and therefore, is a vital natural resource which cannot be plundered by a farcical auction” without consulting the state.

Scroll.in emailed questions to coal secretary Anil Kumar Jain, but they went unanswered. This story will be updated if he responds.