Another 2G, in mining?

Power projects should not be exempted from coal auctions

As the Supreme Court judgment on February 2 cancelling the issue of 2G licences in 2008 reiterated, auctions are the preferred method of handing over natural resources to the private sector for exploitation. Properly designed and implemented, they are useful methods to discover the true price of the resource being allocated. In addition, they have the benefit of being transparent and accountable, at a time when close scrutiny, concerns about ex-post investigation and perceptions of corruption are slowing down discretionary allotments. In this context, the recent rules promulgated by the coal ministry for the allocation of coal mines display steps in the right direction. The Auction by Competitive Bidding of Coal Mines Rules, 2012, lays out a process by which mines will be handed out on the basis of competitive bidding, subject to all bids being above a mandated floor price. The notification for the Rules, however, makes the mistake of specifically exempting the power industry from competitive auction. The government should rethink this poorly conceived loophole.

While there is little doubt that India’s power sector is short of capacity and resources, causing it to be unable to meet the demands of a fast-growing economy, this is a questionable way to stimulate investment and growth in power generation. The argument used in defence of the government’s move runs as follows: power companies already bid on tariffs. They should not be expected also to bid on inputs — the coal blocks that they deem necessary to feed their plants. Thus, low bidders in the power sector will be allotted coal blocks, at the reserve price the Centre fixes as a floor for competitive bidding in other sectors. This argument rests on the government’s continuing unwillingness to allow end-users to pay a rational, input-based cost for their power. That is a principle that cannot endure for too long, as it leads to uneconomic excesses. In the long term, India must expect tariffs to respond to input prices. If the price of coal goes up worldwide, the cost of power made from that coal must go up. The government cannot continually insulate industry and end-users of power from an increase in coal prices.

Even in the medium term, basic economic principles will be violated by this exemption of power companies from competitive bidding. For one, it gives a clear incentive to those bidding on tariffs to quote unrealistically low figures. Successful bidders with political clout, once investment has been made and coal blocks claimed, can then attempt to have their winning bid changed — citing the fact that the tariffs they committed to are too low to be profitable. Second, it is a violation of the reasonable principle laid down in the telecom sector, in which licensing has been delinked from the allocation of spectrum. Here too, access to coal at non-market prices should be delinked from the winning of a power project. Instead of seizing this opportunity to extend transparency across all sectors dependent on natural resources, the government has opened itself up to continual questions about the amount of revenue lost in handing out coal blocks to this or that power company. Market-determined power tariffs are a small price to pay in comparison to the costs, political and economic, of another messy, long-drawn-out 2G-like saga in which allegations of favouritism, revenue loss and corruption are thrown around.