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THE MYSTERIOUS MR CAG

CAG Report on Coal : Glaring Flaws Raise More Questions Than Answers

1) Brief Background

Coal blocks were opened up for private mining in 1993, and the main reason was the inability of Coal India to upscale its output to provide adequate coal to various industries. Over time, Coal India has not been able to expand its capacity or output, and in fact last year it has been short of about one lakh tonnes in its supply, causing severe shortages in coal based power companies.

The policy of allotting coal blocks was in practise during the NDA regime and in fact they really started the process of allocating blocks to private companies at a fast pace. While between 1993 to 1998, just a few blocks were allotted, under NDA about 33 blocks were allotted. They had no system of assessing and the CAG has also pointed out on page 4 of the report, that before 2004, a private company could just get a letter from State Government and get a coal block allotted. There was no transparency under NDA. It was only after the UPA Government came that a system was evolved and a Screening Committee was instituted. Under UPA the new system requires that an advertisement is placed in newspapers, private companies will then apply, the State Government also recommends names, and a Screening Committee which also necessarily has representatives of the States Chief Secretary will based on certain guidelines assess the applicants and then award the blocks.

There was no system of check under NDA, and NDA accuses UPA of malpractice? In every allocation, a representative of State Government was present and without their participation no allocation was made. Till date no State Government has ever complained. Screening Committee has only officers including State officials.

Out of the 57 blocks that CAG has examined, only 4 are from Maharashtra, all the rest are from NDA/ non-Congress States such as Chhattisgarh, Madhya Pradesh, Orissa, Jharkhand, Rajasthan, etc.

CAGs Intentions ?: The CAG report in its Executive Summary quotes a letter of Secretary Coal of 2004 speaking of “windfall gains” to private companies allotted coal blocks. CAG the goes on to say in page 4 that there was no proper system of allotting coal blocks till 2004. A matter of grave concern then is that, if there was evidence of no proper system till 2004, and unfair gains to private companies, why did the CAG not investigate/ audit allocations prior to 2004 also? Why was only the UPA period, in which systems were put in place examined? Clearly the CAG or his officers are acting in a partisan manner, and have either deliberately or for reasons best known to them not looked at the allocations in the NDA period, under the same policy. Does CAG assume that all was well under NDA?

2) Why UPA recommended Competitive Bidding?

It was the PMO in 2004 (UPA) that initiated a note on “competitive bidding” although many in Coal Department and Power department opposed it saying that this might increase cost of coal and interfere in rights of State Governments in allocating coal blocks. In “competitive bidding” anyone interested in mining a coal block will give their quotations on auction fee and the highest bidder would get the coal block. Since this was an entirely new concept, it took almost two years for the Coal Department to undertake various discussions, especially with Law Department to decide how to go about it – whether to amend the law or do it by changes through administrative orders only. The CAG report gives this sequence of events.

CAG emphasises on a letter from Secretary Law in 2006 saying that Government could make administrative changes to bring in the system of “competitive bidding”. Since previously the same department had given a different view, it took Government time to seek clarifications from Law Department, and then undertake discussions with State Governments before they could introduce amendments to the Acts.

While UPA Government wanted to introduce “competitive bidding”, NDA Governments of Rajasthan and Chhattisgarh, Jharkhand and Orissa opposed it, and so did West Bengal. Inspite of their opposition, Government introduced a bill in 2008, after which the Standing Committee told Government to talk to State Governments again. Coal Minister then consulted all State Governments and offered that States can take all the royalty from the coal blocks, but they should support the amendments. It was only after this offer that State Governments agreed, and the bill was passed.

A question is asked why did it take so long to pass these amendments and why were coal blocks still being given to private companies while the changes were being discussed? First, as we see from above and the sequence mentioned by CAG in the report itself, the discussions and consultations took over three and a half years to reach a concensus. In fact, UPA must be congratulated for being the only Government that thought of “competitive bidding” and then convincing everyone of getting the changes passed. NDA on the other hand did not even introduce a transparent way of allocating these coal blocks. Compare this with difficulty in getting GST or FDI or NCTC implemented.

Second, there is an ever-growing demand for coal for power, steel etc., and while the amendments were taking time, growth and progress cannot stop. Thus coal block allocations continued, but under a far more open, and transparent system, with a Screening Committee that NDA never even bothered to put up. Even the CAG ignores this, not even looking at their period, as that would have exposed the NDA.

3) CAG’s figure of 1.86 lakh crores

Let us first see what the CAG has said –

CAG has no where stated that there was any loss to Government or the nation of 1.86 lakh crores. In fact not even of one crore. What CAG says is that in the next 35 years, these 57 companies together would have earned 1.86 lakh crore, and if Government had put in “competitive bidding” earlier, then some percentage of this could have been shared by the Government through auction amount. CAG no where calls this a “scam”, neither does it call it a “loss” and nowhere does it call it “loss to the exchequer”. We must keep this in mind, since the media is showing as if the Government lost 1.86 lakh crores due to privatising of mining.

To compare let us give two pictures. When airways was opened up to private airlines, people complained that profits earned by private airlines would have come to Air India/ Government, hence privatization is anti-national. Similarly, we can argue that due to private media channels, advertisements going to them would otherwise have come to Doordarshan thereby leading to loss. Just as privatising airlines or media is not wrong, privatizing coal mines is also not wrong. All that CAG says is that off the profits that coal miners will earn, Government can have earned some money if the blocks had been auctioned.

There is no statement by CAG about any 1.86 lakh crore loss. So who created this magical figure????

4) Calculating 1.86 lakh crore

Let us also look at how has this figure of 1.86 lakh crore gain calculated.

The Draft Report

In the draft CAG report, the CAG wanted to calculate how much “gain” private companies could make in coal mining. So what they did is that they made following assumptions.

Since none of the mines is actually working, CAG has no way of saying anything that is a fact, therefore they had to make guesses, although no auditor in the world can make any statement based on guesses. Guesses are made in predicting economic changes etc., not for assessing faults. Please remember, that only one out of these 57 mines has started work (media claims that there has been a “scam” – how can there be any scam when no work has started?).

However, since CAG wanted to guess, this is what it did –

How much coal is mined – it took the estimate of Geological Reserve (GR) – a guess by coal experts on how much coal is there in a mine that can be taken out in next 35 years. CAG guessed that 90 percent of the total GR in a mine would be mined by the private companies over next 35 years.

How much will it cost the companies for digging/ extracting out the coal to find out the cost to the companies, it looked at Coal India and other records and made an average price of Rs 421 per metric tonne (MT) as the cost price and multiplied this with how much coal they would mine to guess their costs over 35 years.

How much will they sell the coal for – to find out how much they could earn from selling this coal, CAG took a right decision in the draft report based on quality of coal. Coal comes in different qualities, and their sale price depends on it – for example Grade A coal for power companies sells (Coal India rates) at Rs 3600 per metric ton, whereas Grade F sells at Rs 610 per MT. So they took these different rates to assess profits/ financial gain and took an average price of Rs 630 per MT, as per actual to date figures, drawn from Coal india.

In the draft report they considered public sector units also.

When they submitted the draft report, the CAG faced a problem – the cost of extracting coal of average rate of Rs 421 per MT was too low and much beyond today’s reality. Government and other agencies told CAG that this cost estimate is much below the facts and hence will have to be revised. The CAG found that the cost comes to anywhere near Rs 600 per MT and that private agencies will also have to pay for the money investments etc. So they made some guesses and came up with a figure of Rs 580 per MT as excavation cost and Rs 150 per MT as cost of borrowings and said that the cost of extracting coal to private companies per MT is Rs 733/-.

The Main Report

How much coal is mined – CAG found that their estimate that 90 percent coal can be extracted was wrong. So they revised it to 73 percent for open cast mines and 37 percent for mixed mines (mixed mines are both open cast and under ground mining). 25 mines are open cast and 32 mines are mixed mines.

How much will it cost the companies for digging out the coal – since they found that Rs 421 per MT was ridiculously low, they used the new estimate of Rs 733 per MT. What is interesting here is that all the while CAG has based all its assumptions on Coal India’s estimates and coal sector records, but in the estimation of cost they forgot one important distinction that Coal India also uses – was this deliberate or just incompetency we do not know – they took cost of digging/ extracting coal the same for open cast and for mixed mines. This is completely wrong. By Coals India’s own estimates from their accounts, while it costs Rs 500-700 per MT for open cast, it costs Rs 2100 to Rs 2500 per MT for under-ground mines. Thus CAG should have made some estimate of how much open cast and how much underground in mixed mining and then arrived at a different extraction cost for them. Why was this not done – was it to inflate the assumed financial gain? To illustrate this point, if we assume that 70 percent is open cast and 30 percent is underground, the cost of extraction becomes Rs 1100 per MT.

How much will they sell the coal for – in the draft report, CAG had rightly categorised mines by expected grade of coal in it, since sale price of coal depends on that. Of the total 57 blocks that they audited, 51 have been estimated to have Grade F coal and the other 6 Grade E coal.

The difference in the sale price of Grades according to Coal India is

Grade Cost of Extraction Sale price – CAG uses one average rate Gain per MT according to CAGs average Sale price Sale price according to Coal Indias actual price list Gain per MT –actual prices of Coal India as per actual coal grade
Grade E
Power (3 blocks) 730 1028 298 780 50
Non Power (3 blocks) 730 1028 298 1010 280
Grade F
Power (21 blocks) 730 1028 298 610 -120
Non Power (31 blocks) 730 1028 298 790 60

Grade A – Rs 3690 per MT, Grade E – Rs 1010 for use in other than power, and Rs 780 for use in power production. Grade F – Rs 790 for use in other than power, and Rs 610 for use in power production. Off the 57 units, in Grade E, three are for power and three for non-power, and off Grade F, 31 are for non-power and 21 are for power.

What did CAG do – In-spite of having knowledge of the expected Grade in each of the coal blocks, they ignored their own knowledge and used an average price of all grades – that put the sale price at Rs 1028 per MT (equivalent to Grade D). Obviously there has to have been some logic in this new calculation that they did? If they knew the coal Grade, then why could they not use this? It took us 15 minutes to calculate using the grade wise rates, so CAG could also have done this. The real reason is something different, and which is why the Grade column was also removed from the main/ final report to hide this manipulation.

Using Rs 1028 per MT, a profit/ financial gain of Rs 1.86 lakhs is shown. Now if we use the grade wise actual price that will be realised, then all companies put together loose incur losses (please see attached table).

If we further adjust for real costs of mixed mining will cost, this figure of total loss goes down even further.

Why did CAG not do a “professional job” and why did they ignore facts they knew to arrive at such a high and political volatile figure? Did CAG do this deliberately or are they plain incompetent? Was the CAG misled by his officers?

5) Why CAG report now? 

The coal blocks have been allotted from 1993 to 2009. The CAG could have come out with its report earlier.

That clearly shows that CAG wanted to embarrass the Government somehow or other and there is no other real reason.

Also, since CAG was aware that there was arbitrary and non-transparent system during the NDA rule, why did CAG not look at the 33 projects that NDA allotted? Is the CAG only for UPA rule or is it the auditor to the Government of India, which is in perpetuity. CAG deliberately failed to look at all coal blocks allotted and focused only on the UPA period, knowing fully well that there were skeletons in the earlier allocations? Why?

6) Royalty payment is revenue stream of Govt. for giving lease of Coal Blocks

UPA Government has also raised the royalty accruing from these coal blocks to 14 percent ad valorem, which calculated at CAGs own Rs 1028 per MT sale price would be Rs 150 per MT, or Rs 90,000/- crores. Why has CAG not deducted this figure from 1.86 lakh crore financial gain before announcing their gains? No auditor ever excludes taxes to be paid from arriving at profit. This is a fundamental of accounting and does our national auditor not know this fundamental or have they deliberately ignored this.

Why have the auditing officials misled the CAG on all these figures?

We must also remember, that rate of royalty shall increase every three years.

7) Correct Steps by UPA Government– issues that CAG ignores?

CAG ignores adjusting for the high royalty that UPA Government has imposed, and which shall all go to State Governments, to the tune of Rs 90,000/- crores.

The Government of India has introduced MMDR Bill in the Parliament – which proposes 26% sharing of profit of Coal & Lignite.  This will be over and above payment of income tax by mining companies. We believe this provision has been inserted in the Bill to take care of any extra-ordinary financial gain to Coal Block allottees. NDA never even thought of this, and neither has CAG even remotely thought of this proposal of share in profits?

Why does CAG never talk of that fact that UPA only strengthened the system of allotting coal blocks and NDA completely ignored putting in any system and why has the CAG not even bothered to look at earlier allotments.

Some Other related Issues

8) The Net Present Value of Rs. 1.86 lac crores is only Rs. 39201 crores

Even if we assume that the there is a financial gain of 1.86 lac crores, it will accrue in next 35 – 40 years.  In normal practice, Net Present Value is always stated, as CAG has done in the airports and other reports. The Net Present Value (NPV) of this likely 1.86 lac crores financial gain discounted at 11.03% (rate taken by CAG in other two reports) is only Rs. 39,201 Cr.  (It is conservatively assumed that all 57 blocks will start mining at full capacity in 2015 and will operate for 30 years thereafter)

Further, an investment of more than Rs. 15.00 lac crore is planned on Steel, Power, Coal to Liquid, Cement and other projects for which Coal Blocks have been allotted by the Govt. of India. So the financial gain will be less than 3% of the planned investment on Projects in the critical sectors of economy.

CAG has calculated NPV in case of other reports tabled in the House of Parliament on the same day, but why CAG has not calculated NPV in Coal Blocks allotment report?

9) The International Coal Block Allotment procedure followed abroad

CAG often quotes best international practices, to show how poorly India is doing, but in the case of coal ignores such practices elsewhere. Does it only look at other countries when it suits its point of view? Can an auditor make national news because of its “point of view”.

In almost all the countries of the world except in three countries, that too only recently (Russia, Kyrgyzstan & Kazakhstan) the coal block allotment is made without auction. In some of the countries, it is on first come first serve basis and in some other countries like Australia, it is based on the commitment for investment to be made on exploration and development of coal blocks.

Whereas in India Coal Blocks have been allotted based on investment in end-use projects like Power, Steel, Cement etc. and coal blocks have been allotted for captive use only not for commercial sale.

10 a) Investment & Employment Generation expected from coal block allotments

The capacity of Steel, Power, CTL & Cement projects that will come up based on these Coal Block allotments will be as follows:

–     Steel – 140 million ton, Power – 60,000 MW, CTL – 1,60,000 barrel per day and Cement – 20 million ton

–     The total investment which will come up based on these Coal Block allotments will be over Rs. 15 lac crores on Power, Steel, Coal to Liquid & Cement projects etc.

10 b) Without Coal Block allotment, large capacity in Steel, Power, CTL, Cement etc. would not have been possible.

Without fuel security, the total power capacity of 60,000 MW, 140 million ton Steel, 1,60,000 barrel per day CTL and 20 million ton Cement for which captive Coal Blocks have been allotted, would have never been possible.

Based on the above facts, you can judge for yourself the brazen flaws in the CAG report, and how it is becoming a tool in the hands of the main opposition party to denigrate Indian parliament.

5 Comments on THE MYSTERIOUS MR CAG

  1. What is new? This is what Congrss sokepersons and Ministers are harping day in and day out.Shri Jha is simply parroting his master’s voice. Why have not mention the total no. of mines alotted by UPA. Is it selective amnesia (like that of Kalmadi) or plain lie to mislead the public. It is not expected from a eminent jouralist like you who shoud put both side’s story to enable people decide themself.

  2. Nicely put

  3. Very nicely put. Why not issue this report in Hindi/English in all Print media in simple common man language? This needs to be put across in correct perspective. Can’t allow BJP to walk away with plain murder. Its obvious that CAG is purely doing this to embarass Cong. It did this first in 2G and now in Coal allotment. It is definitely a doctored strategy with BJP in tow and cannot be allowed to continue. CAG’s motives must also be exposed. Its time or else this country will eventually slip into anarchy with Right wing extremists. Whatever little is available in the print media, it seems, BJP ruled states are already being anarchists with crackdown on all protests and human right violations. Cong must take this bull by the horns without delay

  4. dattu mehta // August 28, 2012 at 5:53 am // Reply

    i thing selling coal on cheap price because to give affordable electricity and keep steel price low. we are country still more than 30 % people under poverty level and they equally deserve affordable power second giving coal to private again generate lots of private job which again boots economy.
    third Mr. manmohan not only India honest Prime minister but also worlds honest minister.
    forth we are the second largest mobile market in world after chaina because of same strategy use in telecom sector. i am simply put one question to opposition what they are doing to their respective state. why Gujarat in path of Progress? only because of PPP model and privatisation. what is modi view on this matter. but one think congress need strong strategy to implement reform without consider opposition or even UPA allies like Mulayam , mamatadidi etc

  5. Congresees need to be more ‘Vocal’ , they should speak the language which ‘Aam Aadmi’ understands otherwise BJP’s shouting brigade with false propoganda with the help of Anna, Baba and of course CAG!!!

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