Presumptive losses are only the symptom of a larger malaise

The debate over the CAG report on coal blocks is getting bogged down in numbers now. But that is not what the report is all about. The presumptive loss figures estimated by the government auditor are meant to only convey the impact of the flawed policy for allocation of coal blocks.

The mind boggling loss numbers are just the manifestation of a larger disease which is the propensity of politicians in power to extract a rent for the public resources that they control. And these politicians have found able and worthy partners among businessmen some of whom are going all out to corner valuable public resources, be it land, spectrum or minerals.

Graduating from Licence Raj

The man who will soon be India’s Chief Economic Advisor, Raghuram Rajan, got it spot on in a recent column that he wrote, “What happened to India?” (http://www.project-syndicate.org/commentary/what-happened-to-india-) Calling it Resource Raj, Dr. Rajan says: “India’s corrupt elites have moved from controlling licences to cornering newly valuable resources like land. The Resource Raj rose from the ashes of the Licence Raj.”

You only have to trace history to understand how. The first resource-related scam of the liberalised era was probably the Sukh Ram- Himachal Futuristic Communications episode (what is it about cellular licences and corruption?) of the mid-Nineties when the hitherto unknown company bagged nine licences bidding an outrageous sum of money and was allowed to retain three of them. The powers-that-be granted the licences despite knowing fully well that the company did not have the financial wherewithal to start operations. The Himachal Futuristic case was a clear one of cornering of licences or hoarding of spectrum, whatever you want to call it, aided and abetted by the politician in power. The Unitechs and the Swans of the world copied this strategy years later.

Then came land. We all know the sham of SEZs (special economic zones) which was nothing more than a ploy by corporates to hoard land and then, of course, there is the infamous Nandigram example.

The scam over allocation of coal blocks for captive mining is the most recent example in this trend. Now, how was this possible? Why did private power and steel companies clamour for captive coal mines? It is because coal mining is a public sector monopoly with Coal India and this company, due to various reasons, was unable to meet the rising demand for the commodity.

The ideal solution then would have been to allow the private sector into coal mining, of course, with appropriate regulations and a regulator in place. But what did the government do? It dithered and chose the convenient option of allotting power or steel companies own captive mines. Never mind that the core competence of these companies was producing either power or steel and not mining coal.

Resource capture

The businessmen were not complaining though. They found an ally in the rent-seeking politician to corner valuable resources and worse, squat on them. Simply put, this was resource capture by the private sector. In the case of coal, for instance, the capacities of the mines that were allocated to the private players far exceeded their current requirements.

Take the example of the Sasan and Tilaiya ultra mega power projects awarded to the Anil Dhirubhai Ambani Group company, Reliance Power. The Sasan project is a pit-head power plant of 3,960 MW capacity. It was awarded two mines originally, followed by a third. These mines were to supply coal for the Sasan power plant but the company wanted to use the coal for another power project it was building in Chitrangi, also in Madhya Pradesh. Though not part of the original terms under which the Sasan project was awarded, the government allowed it. That is now subject of a case filed by Tata Power in the Supreme Court.

The apparent logic behind awarding a captive mine to the project was to ensure fuel security and also cheap coal, something that was reflected in Reliance Power’s winning price bid of Rs, 1.17 per unit. But what this policy also ensured was that the winner would gain access to a mine with potential far exceeding his requirement. The Sasan mines are estimated to have 700 million tonnes of coal with peak output of 25 million tonnes per annum, well above the requirements of the power plant. The Tilaiya case is even more startling. The two captive mines awarded to the project are estimated to hold 1.3 billion tonnes of coal with a peak production capacity of 40 million tonnes. Indeed, a presentation in Reliance Power’s website claims that with the total 65 million tonnes of daily output of coal from the Sasan and Tilaiya projects’ mines, as much as 16,500 MW can be produced.

And what is the total capacity of the two power plants part of the projects? 7,960 MW. Therein lies a tale, one that the CAG is pointing his fingers at.

The government and its crisis managers are being smarter by half in attempting to turn the story of the CAG report, which is all about Resource Raj, into a debate over the credibility or otherwise of the presumptive losses. We can debate till the cows come home over whether there will really be a loss of Rs.1,86,000 crore to the government but we cannot afford to ignore the basic fact that this is the fruit of the Resource Raj.

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