Monday, September 10, 2012

"Spectrumgate" Vs "Coalgate"

Corruption in the allotment of coal mine blocks is the latest in India's season of auditor-exposed scams. The Times of India reports that Jindal Power Limited (JPL), a subsidiary of Jindal Steel and Power Limited (JSPL), owned by a Congress MP, benefited by way of accessing captive coal mine block for its 1000 MW merchant power project in Chhattisgarh's Raigarh district. 

The project which turned fully operational in 2008 and is the first merchant power plant in the country (which can sell power at spot rates to any buyer, instead of being bound by tariffs fixed through long-term power purchase agreements) got coal at a concessional rate. The report writes,

Over the next year, it sold power at an average price of more than Rs 6 per unit. By 2010, the high returns had not only covered its running costs but also investments of Rs 4,338 crore. According to infrastructure experts, it takes a minimum of 5-7 years to repay debt incurred for capital investment in power projects... Jindal Power has become debt-free within two years of operation due to strong cash flows on account of low cost. A big component of the low cost was cheap coal obtained from its captive coal mine just 10km away — Gare Palma IV/2 and IV/3 with combined reserves of 246 million tonnes of coal...
The Jindal Group is the largest beneficiary of coal block allocations. It has reserves of 2,580 million tonnes of coal, while the second largest beneficiary in the private sector has just 1,500 million tonnes...  The problem is not that the company got access to massive reserves of coal. The issue is that it uses cheap coal to sell power at prices much higher than the others... documents show that JPL sold 22 million units of power last October for a price as high as Rs 5.47 per unit.
The Times's comparative analysis of three power projects in north Chhattisgarh — Sipat project of NTPC, Amarkantak project of Lanco group, and JPL's Raigarh project - which came into existence around the same time makes for compelling reading. The difference in coal prices could not have been starker, 
Lanco Amarkantak and NTPC Sipat buy coal from South Eastern Coalfields, a subsidiary of Coal India. JPL mines its own coal. NTPC's average fuel cost last year came to Rs 1,200 per tonne while Lanco's cost worked out to an average of Rs 1,020 per tonne. Jindal officials refused to share the company's coal cost figures. But sources in Chhattisgarh's mining industry said JPL's cost could not exceed Rs 300-400 per tonne as it extracts coal from an open cast mine for which it had bought land at low prices. Taking an even broader estimate of Rs 500 per tonne of coal, based on Coal India's current margins, would still leave JPL with half the coal cost of its competitors...
Jindal sold power at the highest prices — Rs 3.85 per unit in 2011-2012, compared to Lanco's Rs 3.67 and NTPC's Rs 2.20. The previous year, JPL had sold power at an even higher rate of Rs 4.30 per unit. The combination of cheap coal and high power prices explains why Jindal posted Rs 1,765 crore as profits, or 60% of its income, while Lanco made a profit of just Rs 155 crore, just 12% of its income. 
Now, if the figures in the ToI report are correct, this is a classic example of private gain at public cost. It is also here that the parallels with the other major scandal of our times, telecommunications spectrum allotment, ends. In case of telecoms, a significant share of the gains from discretionary low cost acquisition of the spectrum was passed on to the consumers in the form of high quality services delivered at very low cost. In other words, the rent-seeking involved in the spectrum allotments generated certain positive externalities. The competitive pressures created subsequent to the allotment process, by design or otherwise, contained incentive compatibilities that forced the companies to share their excessive gains.

However, in case of the mining blocks, despite its fundamental similarity with telecom spectrum, the winners have sought to corner all their disproportionate gains. They have, as the Jindals have done, sought to take advantage of the market structure (the freedom to sell the power so produced on a merchant power route). Or, as most others have done, they have sought to keep the allotted blocks undeveloped, assured by the belief that they were sitting on potential gold mines. In fact, it is a damning indictment of the whole policy framework that barring a few, most of the mines have been allowed to keep them undeveloped despite being allotted at extremely concessional rates.

In other words, unlike the telecom spectrum, where market competition and a policy framework kept the spectrum owners honest and thereby forced them to share the benefits arising from low capital costs, the coal block owners were not constrained by any policy framework.

Update 1 (12/9/2012)

Between June 2004 and 31 March 2011, the coal ministry allocated 194 coal blocks on a nomination basis to various firms for captive use. Mint unpacks more skeletons,

Between 1996 and 2009, JSPL and its unit JPL were allotted nine coal fields in the mineral-rich states of Orissa, Chhattisgarh, Madhya Pradesh and Jharkhand, translating into reserves of 2.59 billion tonnes, or 5.97% of the 43.35 billion tonnes doled out by the Centre... The coal blocks allocated to JSPL on its own and as part of a partnership were Gare Palma IV/1 (1996), Gare Palma IV/2 (1998), Gare Palma IV/3 (1998), Gare Palma IV/6 (2006) in Chhattisgarh, Utkal B-I (2003), Ramchandi Promotional (2009), Urtan North (2009) in Orissa, and Jitpur (2007) and Amarkonda Murgadangal (2008) in Jharkhand.


rahul said...

Thanks for a fascinating insight on the positive externalities of corruption in the 2G case.

I think this brings forth an interesting question: given that there is always some element of graft in the system (and we can't simply wish it away), does this suggest that we could - by design - create a process for resource allotment that implicitly allows "restricted" private gains (like in 2G, both for bribe givers and takers) but in combination with a policy framework (pricing etc.) that ensures that rents extracted are at-least partially shared with consumers?

rahul said...

I.e. if we accept that we are always going to be corrupt, can we atleast create a framework that incentivizes everyone to be corrupt in the most systemically efficient way (where we capture some consumer surplus)?

KP said...

Dear Gulzar,

Thanks for a post that directly addresses the issue.

Two observations, since I don't feel sanguine about
'corruption is ok if the consequences are good' approach.

1. The straightforward corruption element is one where by keeping the consideration for the licenses / mining rights to low / negligible / zero the immediate turnaround sale realized windfall profits for parties parties - whether they were complete shams or fronts for political operators -designed to facilitate corruption.

2. If we were to justify the actions through benefits accrued - there is an element of unintended consequence (uc) - in the case of telecom the uc's were positive in the first round of license distribution but in the subsequent rounds where the price finding mechanism had matured and the risks for investors considerably lesser - it again smacks of being 'designed to facilitate corruption' - creating opportunity for private gain at the cost of public good.

Giving largesse upfront without a clearly defined payback in terms of public good / positive externality that is monitored and enforced is the large area of play that is being exploited.

The difference between regular crime vis-a-vis white collar crimes on Wall Street or sweet deals in rent seeking from resource extraction / spectrum - in the former the attempt is to hide intent and actions through alibis. In the latter there is a studied attempt to integrate intent and action ( including its faux separation) - where intent provides the pre-emptive cover to justify action or a disingenuous smoke screen to provide premeditated legal cover for actions aiding rent seeking / quid-pro-quo deals.

For most part it appears, all it requires to get away with plunder is the ability to convey an aesthetic detachment from the consequences (private gains in this case) of the actions - if at all.

Pratap Bhanu Mehta observed in his edit "Corruption is not just about siphoning off government expenditure. It is about creating frameworks, and foregoing policy possibilities that arbitrarily benefit private parties at the expense of the public. It also looks at opportunity costs of policies. The CAG is not saying that policy is not the government’s prerogative. It is saying that these policies must meet the test of public reason".

So whether it is Power ( that you blog extensively on) or DIAL / Telecom / Coal, Bhanu Mehta adds "There needs to be a complete and public data base on how many of the PPP’s are renegotiated after the fact or have the contracting terms set in such a way that promoters make unduly large profits at the expense of the taxpayer."

Or as TN Ninan puts it in his blunt edit "The political drama, then, starts looking like scripted charade. One guilty bunch with its hands in the till tries to corner another that is caught in the Comptroller and Auditor-General’s klieg lights, while the government’s response is the now familiar mixture of debunking the auditor, making silly claims about revenue not lost, and simply blathering away on television..."

And, may I add that the framework cannot be justified as an afterthought - corruption cannot be tolerated as a kind of trade-off for the positive consequences that accrue from actions legitimate operators. Legitimate operators cannot be used as a smokescreen for rent extraction.

Maybe this is too prosaic, Max Weber says it better "the pursuit of wealth, stripped of its religious and ethical meaning, tends to become associated with purely mundane passions, which often actually give it the character of sport".( Weber "Spirit of Capitalism")

regards, KP.