Ministry proposes new method

Wants revenue share under production-linked payment, readies procedure for competitive bids; cabinet note readied

The coal ministry has proposed a revenue share model under production-linked payment as the methodology for conducting auctioning of coal blocks for allocation to private companies. The ministry has floated a cabinet note detailing this, to form the basis of allocation of 2.7 billion tonnes of reserves in 22 blocks next month.

The ministry has preferred production-linked payment over an upfront lump sum payment by the companies. The bids would be invited based on a production-linked multiple. A company quoting the highest multiple would become the preferred bidder. The method minimises the risk for the developer as against upfront payment method.  

“But we have to ensure the winning bidder has some minimum commitment to develop the block. So, a basic upfront payment has been prescribed. This would be 10 per cent of the intrinsic value of the block,” said a source close to the development.

The intrinsic value would be derived from the average selling price over the past five years, based on international Free on Board prices from the published indices of Platts or Argus, providers of energy price assessments.  

The ministry has also preferred a ‘Rs per tonne’ criterion over ‘profit share’ for selection of the bidder. The former is a revenue sharing method where the bidder quotes a percentage to be shared with the government before recovering his costs. In the profit share method, the bidder recovers his cost before sharing profits with government.  

The companies would quote a fixed ‘Rs per tonne’ number for the entire life of the mine, linked to the Wholesale Price Index change. The government’s share would be calculated in rupees by multiplying the production (in tonnes) with the quoted Rs per tonne number. Also, the floor price for bidding will be calculated by first arriving at the Net Present Value of the reserves, using international benchmark prices.  

To ensure the bidder’s commitment in the production-linked system, the companies would be subjected to a minimum work programme (MWP). This will include detailed exploration and preparation of a geological report, apart from a performance guarantee equal to estimated exploration expenses. The bidder would also have the right to relinquish the block after detailed exploration without any penalty, as long as the MWP has been carried out.  

The bidder would also have to get environment and forest clearances for obtaining the mining lease and to start mining. The selected company would enter into an agreement with the central government until the award of the lease. After this, the conditions will become part of the lease to be granted by the state government under the Mines and Minerals (Development and Regulation) Act.  

The Act was amended in September 2010 to provide for auctioning of 54 blocks with 18 billion tonnes of reserves. The Auction by Competitive Bidding of Coal Mines Rules were notified in February 2012. Under these rules, the ministry has already allocated 17 blocks to government-owned companies.