Behind the auctions

Government has failed to reform the captive coal mine system

When the government auctions natural resources and unexpectedly high prices are paid, what does that mean for the health of the sector? Do companies feel flush with funds, or are they overpaying out of desperation? Is the government maximising current revenue at the cost of killing growth and future revenues? These are reasonable questions, and ones that must be asked in the light of the ongoing auction of coal mining rights, or "blocks". The auction follows the Supreme Court's cancellation of almost all coal mining licences awarded by the government since the early 1990s. Some particularly high prices have been paid. Hindalco of the Birla Group - which was awarded the Talabira coal block under the previous government in a much-questioned sequence of events, a block which it has now lost to the Hyderabad-based GMR - agreed to pay Rs 2,860 a tonne for coal from the Kathautia coal block in Jharkhand.

The auctions are designed with some complexity; the blocks have been separated into various different sets depending on whether they are being auctioned for sectors where prices are regulated or unregulated. The problem is, of course, that this artificially constrains which mine provides coal to which plant. Meanwhile, companies with "stranded" end-use plants in unregulated sectors, plants that have lost their coal supply assurances, will pay prices for coal which might make sense to their shareholders - but may not make sense for the economy as a whole. The problem is that the government, although it has promised to clean up the coal sector, has not carried out the basic reform that would create a market for the fuel; in fact, it has worked hard to prevent a market from forming. This is not because of legal strictures; the government was under no pressure to so completely acquiesce to the Supreme Court's suggestions. After all, an ordinance which made the needed changes to the law governing coal mining has already been promulgated, an ordinance that could have been far more reformist than it was. Had it been properly drafted, without timidity, then many problems would have been avoided.

Look at the consequences of this timidity when it comes to reforming the coal sector. Companies will continue to be dependent on a single source of supply; like telecom companies, they may overpay for that and depress the sector for years. The problem is that the government has made the mistake of staying with the logic of captive mines. This inability to break out of old modes of thinking means that India will continue to see irrational movement of coal. Coal from one state will go to factories in another. A-grade coal from some mines will go to projects that need only D-grade coal, and vice versa. And, of course, it continues to be far from certain that the Indian Railways is even capable of handling the excess movement of coal that the captive mine system brings with it. The government was and is wrong to mandate end-user conditions in such fine detail. Given this, there is no chance of introducing efficiency to such a vital sector. Worst of all, there is still no effort to introduce an empowered independent regulator for the sector. All in all, the hype and high prices of the auction conceal the continuing problems of the coal sector.