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Power Point | November 2015

Capitalising Natural Resources via Auction | A Contrarian View

Capitalising natural resources in a country like India through an auction process, solely with the intention of creating a high stream of revenues for the exchequer, leaves a lot to be desired. Thus, current events in India have moved into a trajectory that reminds us of the musings of a reform process that surely would raise costs for the poor. The case in point is coal block auctions, as it is the poor who pay for coal. The Government after almost a decade of policy posturing, that left more people divided on the issue than ever, brought a semblance of consensus that the way to go was to auction every coal block in India. The polity also seemed to have no other option.

There is no other country in the world that has taken auctioning as the only route and not without reason-the most important and relevant reason being high cost. The auction route raises the cost of coal and the price of coal in India is slated to spiral up when prices are decided based on a cost-pass-through mechanism as more and more of these auctioned coal blocks start to produce, which is actually quite counter-intuitive. Who pays, by the way, for the coal? Mostly the common man pays, as power tariffs work through the pass-through mechanism.

The rhetoric on the bonanza of coal auction bringing in lakhs of crores of rupees, is expected to be the burden to be borne by the poor over the next several decades. The cost of coal extracted from the new blocks would be almost double the marginal cost of coal mines currently in operation when all the costs are factored in. On the contrary, the price of coal traded in the country from the public sector Coal India is currently far lower than the winning bids of the coal auction. If the actual cost has a pass-through mechanism in every commodity and service linked with energy, the electricity price is bound to rise or else the subsidy bill would have to bloat. The bankers who have a large loan portfolio linked to this sector cannot go unscathed.

Table-1: Published coal prices in SCCL
Grade Gross Calorific Value Price Per Ton
G7 5,201-5,500 2,600
4,901-5,200 2,580
G9 4,601-4,900 1,730
G10 4,301-4,600 1,610
G11 4,001-4,300 1,300
G12 3,701-4,000 1,050
G13 3,401-3,700 800
G14 3,101-3,400 710
G15 2,801-3,100 590
G16 2,501-2,800 550
G17 2,201-2,500 490
G14 Yellandu CHP 3,101-3,400 944
* All prices in Rs/ton of coal. The comparison should be done with the average GCV range of 4,000 Kcal/Kg, for which the current prices of coal from Coal India Mines are hovering around Rs 1,000/ton. Thedata given below shows the auctions against the notified price (taken from Scroll.in May 8, 2015)

The published coal prices in the public sector Singareni Collieries Company Limited (SCCL), Price Notification No.61/2015-16 is given in Table-1.

There were a few blocks in which the winning bids had prices below the notified price as well (the Government had reasons for them to be so, citing land acquisition costs, type of coal, difficulty of mining, etc, which, however, should have been reflected in the notified price).

Table-2: Blocks in which Bid Prices were over 100% above Notified Prices

Notified Price Bid Price Difference
Bicharpur 1,420 3,003 111%
Dumri 950 2,127 124%
Chotia 1,310 3,025 130%
Gare 4/7 820 2,619 219%
* all prices per ton of coal

The winning bids in this last category are still far above the current coal being auctioned by Coal India through the e-auction process.

The private players desperate to secure coal for their already constructed power plants made either the Type-1 or the Type-2 errors under business compulsions, as such they were never at fault. They accepted the null hypothesis when it was false (accepting a high cost auctioning process which goes against the overall objectives of the business) and they rejected a hypothesis when it was true (by not participating in the auction they could have gained in the long run).

Let me elaborate the second option open to the private players. If the participation in the coal block auction would have been zero, the coal blocks would have had to be given away to the monopoly public sector entity Coal India and the prices of coal would have come down dramatically and the benefit would have gone to the private players in need of coal and the larger sections of the poor would have benefitted.

Table-3: Blocks in which Bid Prices were positive, but below 100% of Notified Prices

Notified Price Bid Price Difference
Gare 4/8 1,890 2,291 21%
Gare 4/5 2,800 3,422 22%
Ardhgram 1,890 2,302 22%
Brinda Sasai 1,420 1,804 27%
Mandla North 1.600 2,505 57%
Gare 4/4 1,890 3,001 59%
Gare 4/1 950 1,585 67%
* all prices per ton of coal

The Government actually made the process such that it appeared to leave no other option for the private sector, as there were always that desperate few who would have come forward to participate, thereby leaving a non-participant taking the brunt of the price increases anyway.

The political compulsions of a polity came before the interests of the country, both poor and rich. The rising rhetoric of goodwill that it enshrined left few with the options to point out the pointless economics behind such an act.

The quandary in which the private players have been left to has even more widespread ramifications, and if the direction remains the same for any natural resource to be given for private sector exploitation, then the interest for such exploitation would be waning at an accelerated pace.

What does this leave the private sector with? If the blocks allotted are not aggressively ramped up, the cost has no chance of coming down either. So the private sector would have to go for it forthwith. Some would be rambling to see how the domestic coal prices pan out in the short and medium term and take the initial brunt of the fixed costs. But it is rather odd that when the world´s coal prices have reached the nadir, India raises the toast for the ´highest cost coal producer of the world´ tag.

Authored by Mr Procyon Mukherjee, President, Central Logistics Function, Hindalco, Mumbai. He has been associated with the Aditya Birla Group for nearly two decades. The views are personal.

Table-4: Blocks in which Bid Prices were below Notified Prices

Notified Price Bid Price Difference
Mandla South 1,890 1,852 -2.0%
Kathautia 3,145 2,860 -9.1%
Sialghogri 1,600 1,402 -12.4%
Lohari 2,800 2,438 -12.9%
Belgaum 2,345 1,785 -23.9%
Marki Mangli 1,310 918 -29.9%
Nerad Melagaon 1,130 660 -41.6%
Meral 2,800 727 -74.0%
* All prices in Rs/ton of coal
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