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Editorial | September 2014

On the block

Just when the power sector was beginning to find its feet again, thanks to a slew of decisions taken by the new government, along comes the Supreme Court verdict declaring the allocation of 218 coal blocks made since 1993 as ¨illegal and arbitrary¨. Though at the time of writing this piece, it is still not clear if these allocations will be scrapped, it follows from the ruling (and from principles of law) that if an agreement is declared void ab initio, it is deemed to be null and void in the eyes of the law.

Added to the current shortage of coal for running the plants, the apex court´s decision has the potential to deal a body blow to the power sector, mainly by erosion in investor sentiment. Though it´s nobody´s argument that the country´s scarce mineral resources should be squandered away by an illegal process to foster crony capitalism, the ramifications of the SC decision will be felt for a long time by the power sector.

A few analysts have declared that around 28,000 MW of power capacity may be affected, but I feel that this figure may be on the higher side, as I indicate later in this piece. I feel that the biggest fallout will be because global investors will now think twice before sinking their funds into India, because business confidence will now take a severe beating.

Plus, how will the SC enforce its decision? Reportedly, a panel of retired judges will look into each allocation and come to a decision on a case-to-case basis. This remedy may be worse than the actual disease. The amount of time that such an exercise would consume, coupled with the legalistic foot-dragging that accompanies such judicial reviews, is only bound to complicate the process of solving this conundrum. But I see some light at the end of the tunnel. Only around 31 of the 218 allotted coal blocks under review are currently operational. Reports indicate that these mines were expected to produce around 53 million tonnes of coal in this fiscal.

Instead of having a judicial panel review each and every case, I have a few suggestions that can speed up the process considerably.

First, those mines which are still not operational should be taken back immediately by the government.

Second, the Centre can declare that those firms (in charge of the errant 31 blocks) which are operational should pay a premium for the rest of the coal that they will draw from the captive block. They should also be levied a ´windfall gains´ tax. Third, there should be absolutely no move to hand over the seized coal mines to Coal India. The public sector behemoth is burdened enough by its current responsibilities. These mines could be put up for a rebid.

If there is one factor that holds out some hope for the power industry, it is the softening of international coal prices. Increased output from coal producers like Australia, Colombia and South Africa have coincided with weakening demand from China and a few other emerging economies. Beijing is now very concerned about the environmental fallout from its overheated economy and is looking at healthier alternatives for its energy mix. In fact, global coal prices are down a whopping 70 per cent from their 2008 all-time highs.

Open, transparent bidding of these blocks is the only way forward. Some puerile arguments are being put forward saying that bidding would substantially increase the cost of coal. Nothing could be farther from the truth.

In fact, if coal had been thrown open to the private sector for commercial mining at the time India was breaking free from the licence-permit-quota Raj, we would not be in the mess that we find ourselves in. If decisions can be taken quickly as per above, the SC judgement may well prove to be a blessing.

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