State-owned companies won't have to pay reserve price till exploration is over

The coal ministry will allocate 8.5 billion tonnes (mt) of reserves to government companies without arriving at a reserve price, owing to the dismal performance of state-owned coal exploration companies.

Government companies are exempt from bidding under the new guidelines, but the absence of a reserve price has led to uncertainty on future cash flow accruing from the blocks. Even as the January 30 deadline is approaching, not a single company has applied for block allocation so far.

The government’s original plan was to identify blocks for allocation, calculate their reserve price, invite applications from companies and select an applicant, based on a set of criteria, including financial strength and past track record. “The pace of exploration by Central Mine Planning and Design Institute (CMPDI) has been very slow. So, it has been decided the selected companies will be asked to pay a token amount, similar to a bank guarantee, and give an undertaking that the reserve price will be paid later after the exploration is done,” said a senior coal ministry official.

The government wants to allocate 54 coal blocks to public and private sector companies under the Auction by Competitive Bidding of Coal Mines Rules notified in February 2012. Government-owned companies and private firms setting up power projects that won tariff-based bidding for supply have been exempted from bidding. In the first phase of allocation, the coal ministry has invited applications from government companies for allocation of 17 blocks. However, none of those explored, is currently on offer.

Interestingly, the coal ministry’s plan is to ask the selected companies to carry out exploration themselves. After this, the government would calculate the reserve price to be paid by these companies, by linking it either to global coal prices or using Coal India prices as benchmarks. The calculation of the reserve price would be based on the estimate of reserves made in the geological reports after exploration.

Asked whether the companies possess the technical wherewithal to carry out exploration themselves, particularly because the applicant companies include state-level industrial development corporations, the official said, “There is no other choice. If we leave it to CMPDI, the exploration would take many years.” Another problem with the government’s plan is that the mechanism goes against the recommendation of CRISIL, the private consultant appointed to suggest the methodology for fixation of reserve price and floor price for bidding. The private consultant, CRISIL had recommended that, as far as possible, the government should refrain from putting unexplored blocks for bidding. The 17 blocks currently on offer include 14 acreages earmarked for companies setting up end-use plants in the power and steel sectors and three blocks earmarked for allocation to mining companies.

The current drive comes nine months after gross irregularities in coal allocation surfaced creating a nationwide stir.