The government might rule invalid five of the winning bids in the recently concluded captive coal mine auctions, on suspicion of cartelisation. Now, the bids for a particular mine can be very low for two kinds of reasons: locational disadvantage (the nearest railhead can be far off) or due to cartelisation. If the latter, then, the government should scrap the auctions as a whole and not just those where prices have come out low.

This is for two reasons. One, the design of the auctions, common to all bids, has some flaws that permit cartelisation; and two, the bidders who collude to let another gain in one particular case would not do it out of the goodness of their heart but on the firm understanding that the gainer in this case would return the favour in other bids for other mines. This means that all bids are suspect and need to be dumped and fresh auctions held eliminating design flaws.

Are there design flaws? There are two. One is that the same business group can submit multiple bids, putatively for different projects. Since coal from one captive mine linked to Project X can be transferred, under the terms of the bidding, to another Project Y belonging to the same group, multiple bids by the same group should either not be allowed or counted as just one, while looking for the minimum of five bidders needed to go ahead.

The second flaw is that the government does not allow the entire lot of aspirants who qualify to bid on technical parameters to participate in the financial bidding. Whyever not?

The biggest flaw, however, is that all these auctions have been for captive mines, no independent or merchant miner of coal can bid. This is a continuation of the earlier flawed policy of awarding captive mines, without bringing in specialised mining players who can compete with Coal India Ltd (CIL) to create an active market for the fuel. Scrap CIL’s monopoly on merchant mining, introduce specialised miners, both local and foreign; this could have the added benefit of bringing in more FDI. The coal ordinance provides for it and that will yield the cleanest outcome.

What captive mining does is to induce inefficiency. A producer of steel, aluminium, cement or power is good at producing steel, aluminium, cement or power and, in all probability, a far inferior miner of coal as compared to a specialised mining company that does nothing but mining. Captive mining is thus a double whammy. It lowers the value added in coal mining, and robs the government of taxes. Further, a producer of steel with a captive coal mine has the opportunity of shifting value added in mining to value added in steel.

This is an incentive to be less efficient in steelmaking, as compared to the global best. An Indian steel producer with a captive mine of coal and a captive mine of iron ore ought to have vastly superior profitability as compared to say, Posco or Nippon Steel, which companies import all their raw materials, but do not. Captive mining, with different right-to-mine costs, ranging from zero in the case of public enterprises and Tata Steel, to very high in the case of some successful bidders in the recent coal auctions, creates a very unequal playing field in energy-intensive industries. Captive mining must go.

Merchant mining is the way to go. The coal ordinance already makes it possible for the government to award merchant mines, effectively ending Coal India’s monopoly in coal. Merchant mines should be awarded the way oil and gas blocks are awarded — through competitive bidding on the revenue share would be mine operators are willing to give the government.

All this is not rocket science. It is fairly obvious. The question is, why then did the government go in for allocation of captive mines, instead of proceeding to merchant mining?

There are three possible explanations, none of which is edifying. One, the ruling BJP wants to drive home the point that the UPA government gave away huge undue benefits to private companies by not holding auctions.

Two, the political class is loath to give up the power of patronage that Coal India’s continued monopoly and resultant premium on getting a coal linkage or allocation of the right coal mine (in case of tariff-based bidding for power projects). Three, the government is scared of taking on the unions in Coal India that oppose breaking state monopoly.

Manmohan Singh wanted to allocate captive mines via auctions, but the law did not allow that without the permission of state governments. Three BJP-led state governments, Rajasthan, Chhattisgarh and Madhya Pradesh opposed auctions, as did the governments of Orissa and West Bengal. To claim that the responsibility for not holding auctions for allocation of captive mines lay with Manmohan Singh is disingenuous.

Manmohan Singh then got the law amended to make auctions possible. The law finally got amended and notified only in 2011. The NDA did not need any coal ordinance to auction off captive mines.

Of course, huge undeserved benefits flowed to the allottees of captive mines. But this was inherent in the policy of captive mining, and did not depend on the method chosen to allocate captive mines. The way to clean up coal is to end captive mining for all, auction of mines to those who offer the government highest revenue share and regulate the working of the mines to ensure safety standards.