The looming confrontation with the CAG could well be a minefield for the Congress

The Rs.1.86 lakh crore coalgate scam exposed by the Comptroller and Auditor General of India (CAG), which has dragged Prime Minister Manmohan Singh into its centre, shut down Parliament and stirred up a raging national debate, will now be examined by the Public Accounts Committee (PAC). The report has led to Dr. Singh finally taking full responsibility for the decisions of the Coal Ministry, but only after rebutting the CAG’s observations as “clearly disputable and flawed.”

Dr. Singh’s rebuttal on coalgate can be broadly broken into four heads. With the battle lines drawn, and the action eventually shifting from Parliament to the PAC, what is the CAG’s line of defence in the PAC likely to be?

1. Zero loss from coal blocks

The government’s primary counter claim, as in the case of 2G, is of “zero loss,” since there has been no mining from the coal blocks that have been allocated. However, the CAG is likely to point out that once captive coal blocks are allocated, the holders stand to reap the windfall gains whenever they exercise their right to mine the block.

The longer the captive coal block holders wait, the more they gain, since the value of coal that they have “hoarded” helps boost the valuation of their companies. Given the rising trend of coal prices, both domestic and imported, waiting to reap a higher windfall gain at a later stage, is a winning strategy.

Additionally, in the absence of firm assessment of mineable Geological Reserves (GRs), lack of instructions on disposal of surplus coal, and proper monitoring, captive coal block holders can reap greater profits through excessive mining or through diversion of coal to the black market.

The CAG will highlight that the 2G scam offers a similar parallel. Loop Telecom’s 4.4 MHz of pan-India 2G spectrum — which was allotted in 2008 at a 2001 price of Rs.1,658 crore — is now worth a staggering Rs.12,350 crore as per the reserve price of Rs.14,000 crore set by the Cabinet last month, without a rupee invested in infrastructure, employees or branding.

This is a mind-boggling 50 per cent annual increase in the value of the spectrum held by Loop by pure squatting. Once bidding for coal mines takes place, the real value for their owners will emerge in much the same manner. However, non-utilisation of coal mines is grossly against national interest, especially if the purpose was to improve power production and enhance the pace of industrialisation.

The CAG’s conclusion is likely to therefore remain that, assuming a zero loss from coal block allocation on grounds that production has not commenced is far-fetched.

2. Coal blocks cannot be de-allocated

In its allocation letters, the government had stipulated that the government would de-allocate the coal blocks if the development of the blocks and commencement of coal production failed to meet the prescribed milestones.

The CAG will highlight the fact that several coal blocks have been de-allocated in the past because of non-performance. In fact, some of the captive coal blocks allocated to private parties were de-allocated from Coal India Ltd (CIL). For instance, the three coal blocks (Moher, Moher-Amlohri Extension & Chhattrasal) allocated to Reliance Power for their Sasan UMPP were de-allocated from Northern Coalfields Ltd, a subsidiary of CIL.

In any event, if there have been flaws in the allocation process, either because of the screening committee or because of incorrect information provided by the captive coal block holders, the coal blocks are liable to be de-allocated on the lines of the Supreme Court decision in the 2G case, the CAG will argue. Going by this precedent, the CAG will not cave in to the argument that de-allocation of captive coal blocks is an impossibility.

3. CAG’s windfall calculation is flawed

The government has argued that it is incorrect to arrive at windfall gains by comparing CIL costs and prices. The CAG is likely to patiently repeat that there are only three other price alternatives available for end-user projects (EUP) for which captive coal blocks are allocated, besides coal through captive coal production. These are: (i) coal-linkages from CIL based on CIL base prices, (ii) e-auction prices of CIL and (iii) imports. Since the sale price used for comparison in the CAG Report is the CIL base price, which is far lower than the other two alternatives, the CAG would argue that its loss assessment borders on conservative.

Additionally, the coal ministry has itself admitted that the CIL’s cost of production, given its social and legacy overheads, is actually higher than the figures used by the CAG. Since costs differ across mines, the CAG report has used average CIL costs (and prices) for its calculations, while considering an additional financing cost of Rs.150 per tonne, indicating that the CAG’s profit per tonne of coal estimate is also rather conservative. For mineable geological reserves, the profit per tonne of coal has been multiplied by the expected mineable geological reserves (GR) in each of the coal blocks to arrive at the total windfall gain. Wherever the mining plan had been prepared, their GRs have been considered. Where mining plans are not available, the CAG has used conservative figures of 73 per cent for open cast and 37 per cent for mixed mines as against the Coal Ministry’s own norms of 75-80 per cent for open cast and 45-60 per cent for underground mines mentioned in its counter. The CAG is likely to encash these inadvertent admissions.

Finally, the Coal Ministry has itself admitted that competitive bidding would be meaningless if mineable reserves for each of the coal blocks were not correctly assessed, yet most of the coal blocks were allocated without a correct assessment of mineable reserves.

The CAG will certainly use these examples to conclude that its estimates of windfall gains border on conservative rather than flawed.

4. CAG failed to quantify government loss

The government has alleged that the CAG report does not quantify the loss to the government while mentioning that “a part of this financial gain could have been tapped by the government by taking timely decision on competitive bidding for allocation of coal blocks.” However, the CAG will likely highlight that unlike in 2G, where the 3G auction price became the benchmark for the loss calculation, in the case of coal it is not possible to quantify the revenue loss before actual bidding takes place. As per the rules for competitive bidding notified (February 2012) by the Ministry, the proceedings from bidding would accrue to the respective coal-bearing states.

As in the case of 2G, the CAG will assert that it was the duty of the government, as the custodian of India’s national resources, to assess the mineable reserves in respect of each of the captive coal blocks and apply correct assessment of sale prices and cost of production to ensure that not only are the captive coal blocks allocated through a transparent mechanism of competitive bidding, but also that the government’s financial interests were well protected.

It is unclear whether the PAC proceedings in the coalgate scam will go the way of the 2G matter. However, what is now fairly apparent is that the Congress will underestimate CAG Vinod Rai and his team’s tenacity, preparedness and rigour at its own peril.

shalini.s@thehindu.co.in