India, an extremely resource-rich nation, is finding itself increasingly in a fix over allocation of natural resources. A growing list of scandals, accusing the government of extending benefits running into lakhs of crore to private parties during these allocations, has surfaced. Consultancy firm Deloitte’s Senior Director Amrit Pandurangi, a noted expert in infrastructure and related areas, recommends a course-correction for the embarrassed government in an interview with Sudheer Pal Singh. Edited excerpts:
Given the massive controversies in 2G spectrum and coal, there is a huge wave of public opinion in favour of auctioning. Would this set right past ills?
All natural resources cannot be treated the same way. Some resources are meant completely for commercial exploitation. These can be taken up for bidding. But there are other natural resources for which a strong public purpose is involved. For instance, land and water are resources for which rights cannot be given to whoever bids the highest. These have to be given out in a transparent manner but not necessarily to the highest bidder since these are not financial products. India began with treating everything as a natural resource that has to be carefully given away. At a certain stage it gave away even commercial natural resources at a low price, allowing the private sector to make huge profits. So, now we should not suddenly swing to the other idea of allocating all resources through bidding. Even if a resource is to be given on a non-competitive basis, transparency should be maintained and the rules of the game should be clear.
But how can transparency be induced without bidding? In coal, the government allocated blocks through screening committees that considered a range of criteria including net worth and intent and so on. If this were not transparent enough what else would be?
There has to be a distinction between transparency and bidding. Bidding is a process of allocating a resource whereas transparency means that the rules of allocation are simple and made known to all parties in advance. These rules do not necessarily have to be bidding-based.
When the clamour for auctions was at its peak, led by Supreme Court’s observations in the 2G spectrum case, the government exempted power projects that were awarded on the basis of tariff-based bids from bidding for coal allocations. Hasn’t the government created grounds for a future conflict by doing this?
Nothing prevents somebody from saying these projects were not bid out. But the government should explain that since power is important for economic growth, it has taken a deliberate policy decision in which preference has been given to certain parties in the larger public interest. At the same time, blocks should not be given out in a random manner and a framework should be followed on who gets what and on what basis. And, if a competitive process can be run within that framework, it should be done. Now, because the government would have differentiated between companies during this allocation, one can argue that a level playing field has not been provided. But the government should clarify why there was no level playing field. It is almost like job reservations, against which people argue that it is not a level playing field. Of course it isn’t, but that’s because we have deliberately chosen a policy of creating an uneven field because a party has suffered in the past and needs more assistance. One cannot say everything should be discovered on a market basis.
By this logic, is the government correct to exempt from bidding those mineral deposits where the value of mineralisation is not known?
Yes, provided the policy framework is clear and made known in advance so that parties involved do not take advantage of the ambiguities involved. The problem is that the government does not often make these rules clear and keeps announcing draft policies. And these draft policies are not finalised for many years. This creates ambiguity owing to changes that take place in the interim. Also, policy changes should not be made suddenly. This problem has developed in the regulatory space. The government sets up a regulator with legislation to back up its job. But the moment the government is not comfortable with its job, it comes up with another legislation to reduce the regulator’s powers. This is dangerous because it creates uncertainty particularly for international developers.
The Supreme Court, through its recent verdict in the 2G case, has given the impression that absolutely no resources should be allocated without bidding in the future. Going by your “resource distinction” theory, is this not a concern?
It is a bit of an issue. But the court has also come down heavily on the process that was followed for allocation. The court has said the government did not follow its own principle. It said the government kept changing its definition of first-come-first-served to suit a party and that suggested malafide intention. The court has said, although not in as many words, the government lacks a proper and consistent methodology of implementing what can be done through non-competitive allocation, so the best option is that the government goes for competitive bidding in the future.
A presidential directive was issued recently to force Coal India Ltd to commit supply to upcoming private power producers. Many analysts consider this an attempt to encroach on the autonomy of a public sector company, which has been granted this privilege under the “maharatna” label, and the world’s largest coal producer. How dampening is this for investor sentiment?
The cause for concern is not the presidential directive in itself but the signal that it has sent, which is that public sector companies are the government’s babies and it will do whatever it wants with the baby. This effectively means that there is no autonomy for these companies. This is very demotivating for the top management of any company. The government has told all the capable people in the public sector that they can be great managers but they have to do what the government says. The government did not do the right thing in this case. It has weakened the institution of the public sector.
But the government had no choice. Coal supply had to be tied up urgently for plants where investment worth thousands of crore was being stalled.
The government should have examined why Coal India is so adamant about not signing fuel supply agreements [FSAs]. The Coal India board had made it clear that in case it fails to meet the commitment, it will create a huge financial problem for the company. The company also said the government is not giving the company clearances so it cannot ramp up production very fast owing to union problems and so on. The government should have discussed the issue with Coal India and come to a middle path — for instance, signing FSAs at 75 per cent. Now if Coal India is not able to meet commitments, its profitability will go down. Coal India is a listed company. The government went ahead and listed it. Now it is telling all the stakeholders, including TCI [The Children’s Investment Fund], that we are not worried about your returns. This is a very wrong message. So the next time a public sector company goes to the market, no retail investor will invest, thinking that returns are not driven by fundamentals but by some whimsical decisions of the government.
The New Coal Distribution Policy laid down, as early as 2007, that Coal India must meet 100 per cent domestic demand, even if it means importing coal. If Coal India has not readied itself for imports by now, is it not also to be blamed?
Public sector units dealing with international markets have a lot of constraints. Today, the chairman of any public sector company would be extremely hesitant to ask his general manager to go to Australia, sit there for a week and negotiate and get the coal deal done. This does not work in the public sector space where many committees are formed and take a lot of time to make decisions. But Coal India should learn to deal in the global markets. It has no such experience, unlike, say, MMTC.
Finally, what other options did the government have, given that most powerful corporations in the power sector were pressuring it with legally enforceable Letters of Assurance (LoAs) for supply?
The fact that Coal India is going to have shortfall is not a recent discovery. Coal shortage was mentioned in government reports as early as 1980s. But the government woke up very recently. Also, even if we assume that CIL had enough coal to supply, we do not have the distribution mechanism, including railway rakes for dispatch, geared up. Is the government doing enough to eliminate this bottleneck? If we import 100 million tonnes coal today, it will all be lying at the ports. Would the government call the Railways tomorrow and force it to sign agreements? This is not the way to do things. The Prime Minister’s Office should ask the Railways today about how prepared it is to receive this imported coal and distribute it. If the Railways cannot do it for foodgrain how will it do this for coal? And this, 20 years after the nation discovered that we do not have enough storage capacity for foodgrain!