Spurt in global coal prices and loopholes in allocation led to coalgate - Quoted in the Business Standard
The mad rush for grabbing coal reserves by corporates with links to political heavy weights, as exposed by the Comptroller and Auditor General of India (CAG) and the Central Bureau of Investigation (CBI) in the coal scam, should not come as a surprise. Superimposing the consistent rise in global coal prices over the yearly data for coal blocks allocated over the past decade reveals the real reason behind the Rs 1.86 lakh crore scam.
The quantum of reserves allocated to companies has moved in a surprising tandem with the global prices year after year. Interestingly, not only did the allocations jumped with the rise in prices between 2002 and 2007, they also dropped at exactly the same time as the prices fell. No doubt, the Indian economy is fully-integrated with the global developments.
The global coal prices remained largely stable below $25 per tonne during late 1990s and early 2000s. Coal block allocation began in India in 1993. The government allotted 41 blocks over the next decade to 2003.
Prices started shooting up in 2003 as demand from developing economies, particularly China, rose. The upward trend continued and prices touched a high of $190 per tonne in 2008 when the global meltdown led to a crash in coal prices. Consider the benchmark price for thermal coal exports from Newscastle in Australia, the world’s biggest coal export harbor. The Newcastle prices increased from $25 per tonne in 2003 to a high of $185 per tonne in early 2008. The number of blocks allotted annually in India also jumped from 5 in 2004 to 52 in 2007.
Post 2007 and early 2008, the prices came tumbling down from $185 per tonne to $80 per tonne currently. The number of blocks allotted also came down from 52 in 2007 to 24 in 2008, 16 in 2009 and finally 2 blocks allotted in 2011. Overall, the government had allotted a total of 195 coal blocks with reserves of a whopping 43 billion tonne (BT) to 289 companies between 1993 and 2011.
A closer look at the growth of margins available to companies between 2003 and 2008 in coal mining, along with the relative ease of bagging reserves, further reveals why the coal scam was waiting to happen. Against a market price of $25-30 per tonne in 2003, the cost of production worked out to around $20 per tonne in India, leaving a tiny margin of $5 on every tonne of coal mined.
This margin went up to as high as $130 per tonne in 2008 when prices jumped to $180 per tonne even as cost of production rose to $50 per tonne. “Coal mining did not make much business sense in 2003. But the possibility of huge profits that was available at the back of a rise in market prices in 2008 ensured that blocks which were hitherto unviable became economically viable. Hence, the mad rush for grabbing blocks. Otherwise there is no business sense in acquiring an asset without experience,” said Dipesh Dipu, Partner at Hyderabad-based energy and resources focused consulting firm Jenissi Management Consultant.
While the spurt in global coal prices gave the economic backing for the mad rush for grabbing blocks, the loopholes in allocation method provided the enabling administrative environment for the scam to flourish, according to experts. “The process itself was such that companies which could prove that their projects have performed well were found more eligible. There was a feeling that less influential people would find it difficult to get blocks in this “beauty parade” of projects,” a senior analyst from a consultancy firm said.
The United Progressive Alliance (UPA)-I government led by Prime Minister Manmohan Singh, that came to power in 2004, had floated the idea of competitive bidding for captive block allocations. However, a Bill to introduce auctioning could be tabled in Parliament only in October 2008. The rules for competitive bidding in coal allocation were notified on 2 February 2012. The government attributed the delay to conflicting pieces of opinion given by the law ministry to formalize the legislation and the opposition from the sates which feared they would lose control over allocations.
The quantum of reserves allocated to companies has moved in a surprising tandem with the global prices year after year. Interestingly, not only did the allocations jumped with the rise in prices between 2002 and 2007, they also dropped at exactly the same time as the prices fell. No doubt, the Indian economy is fully-integrated with the global developments.
The global coal prices remained largely stable below $25 per tonne during late 1990s and early 2000s. Coal block allocation began in India in 1993. The government allotted 41 blocks over the next decade to 2003.
Prices started shooting up in 2003 as demand from developing economies, particularly China, rose. The upward trend continued and prices touched a high of $190 per tonne in 2008 when the global meltdown led to a crash in coal prices. Consider the benchmark price for thermal coal exports from Newscastle in Australia, the world’s biggest coal export harbor. The Newcastle prices increased from $25 per tonne in 2003 to a high of $185 per tonne in early 2008. The number of blocks allotted annually in India also jumped from 5 in 2004 to 52 in 2007.
Post 2007 and early 2008, the prices came tumbling down from $185 per tonne to $80 per tonne currently. The number of blocks allotted also came down from 52 in 2007 to 24 in 2008, 16 in 2009 and finally 2 blocks allotted in 2011. Overall, the government had allotted a total of 195 coal blocks with reserves of a whopping 43 billion tonne (BT) to 289 companies between 1993 and 2011.
A closer look at the growth of margins available to companies between 2003 and 2008 in coal mining, along with the relative ease of bagging reserves, further reveals why the coal scam was waiting to happen. Against a market price of $25-30 per tonne in 2003, the cost of production worked out to around $20 per tonne in India, leaving a tiny margin of $5 on every tonne of coal mined.
This margin went up to as high as $130 per tonne in 2008 when prices jumped to $180 per tonne even as cost of production rose to $50 per tonne. “Coal mining did not make much business sense in 2003. But the possibility of huge profits that was available at the back of a rise in market prices in 2008 ensured that blocks which were hitherto unviable became economically viable. Hence, the mad rush for grabbing blocks. Otherwise there is no business sense in acquiring an asset without experience,” said Dipesh Dipu, Partner at Hyderabad-based energy and resources focused consulting firm Jenissi Management Consultant.
While the spurt in global coal prices gave the economic backing for the mad rush for grabbing blocks, the loopholes in allocation method provided the enabling administrative environment for the scam to flourish, according to experts. “The process itself was such that companies which could prove that their projects have performed well were found more eligible. There was a feeling that less influential people would find it difficult to get blocks in this “beauty parade” of projects,” a senior analyst from a consultancy firm said.
The United Progressive Alliance (UPA)-I government led by Prime Minister Manmohan Singh, that came to power in 2004, had floated the idea of competitive bidding for captive block allocations. However, a Bill to introduce auctioning could be tabled in Parliament only in October 2008. The rules for competitive bidding in coal allocation were notified on 2 February 2012. The government attributed the delay to conflicting pieces of opinion given by the law ministry to formalize the legislation and the opposition from the sates which feared they would lose control over allocations.
posted by Dipesh Dipu @ 10:39 PM
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