Report on Posco fails to impress Ramesh

Even as the government has speeded up efforts to put in place the much-awaited auctioning regime for coal allocation, the domestic industry is against the move arguing that it would increase the financial burden of companies and lead to market distortions.

Competitive bidding will replace the practice of allocating blocks based on recommendations of an inter-ministerial committee. “We are strongly against the auctioning process being put in place by the government for exploitation of mineral resources, including coal. The bidding regime will put additional financial burden of companies and lead to wastage of valuable resources,” R K Sharma, secretary general of Federation of Indian Mineral Industries (FIMI) told Business Standard.

The government last week came out with draft guidelines for the auctioning regime that is aimed at bringing in “transparency and objectivity” in the overall coal block allocation process. “The royalty system is already in place for capturing the economic rent attributable to the states. Applying additional financial impost, either up-front or as a revenue share during production would strongly discourage risk capital for mineral exploration,” Sharma said.

The draft presents four models for selection of successful bidders during the multi-step auction process — upfront payment, production-linked payment, upfront payment with priority for development status of the end use plant and production-linked payment with preference for development status of the end use plant in the power, cement and steel sectors.

Sharma said in the absence of enough incentive for the private developer to invest in high-end technologies, a large part of the mineral wealth may go unexplored. “Auction will lead to destruction of resource as main efforts of the entrepreneur will be to maximize profit at the cost of proper scientific development of the resource,” he said.

India’s largest coal producer, Coal India Ltd (CIL), however, does not share FIMI’s concern. “So far a bidder used to get coal free of cost through the screening committee route. This was akin to getting an indirect subsidy. But today, with the liberalization of the economy and stiff competition, it is only logical for the government to charge companies through auctioning,” said a senior CIL executive who did not want to be named. “Even when companies acquire blocks abroad, they have to pay for it. So why not domestically?” he reasoned.

Coal ministry officials said views of the industry would be considered and changes in the final policy would be made accordingly. Industry experts believe auctioning of mineral reserves makes sense only when proper data on the potential of a mineral block is available.

“Competitive bidding does not make sense for granting exploration licences as it becomes difficult to put in a meaningful bid unless the potential of a reserve is known accurately. But after the resource potential has been identified, auctioning should be carried out to ensure the resource is distributed in a transparent manner,” said Gokul Chaudhri, partner, BMR Advisors.