End discretionary allocations in coal and everything else

The report of the Comptroller and Auditor General on coal block allocations highlights the mess in the coal sector, but has led to very faulty interpretations of what exactly has gone wrong. The report exposes the pitfalls of ministerial discretion to allocate coal blocks. Market-based procedures like auctions, which would eliminate bribes and increase revenue, are better. Allocation by lottery among qualified applicants would also eliminate bribes in cases where the government seeks low prices rather than revenue.

Allocations have never been limited to coal, or to the period from 2004 onward. Allocations have been the politician’s procedure for handing out licences and permits of every sort since independence, for coal and everything else. The CAG is wrong to focus only on coal, and only on allocations after 2004, as though the problem started then. No, the problem has been there since 1947.

Ironically, critics are targeting Prime Minister Manomhan Singh, who was the first to suggest shifting from bribe-loaded allocations to bribe-free auctions in 2004. His proposal failed, says coal minister Jaiswal, because of resistance from opposition-ruled states-these had the coal deposits, and had to be consulted while making allocations. Such consultations doubtless provided kickback opportunities for all. No wonder they all resisted auctions, including Congress.

Singh failed to get support from Sonia or opposition parties for auctions, but he was the first to suggest the right procedure. Instead of being lauded for this, he is being pilloried as though allocations and corruption started in 2004. Sorry, but allocations have been India’s bane since 1947, and evil inherent in the licence-permit raj. The losses of “coalgate” calculated by the CAG pale into insignificance compared with losses through allocations in all sectors since independence.

The BJP was in power in 1998-2004, but did not propose or implement auctions. The CPI was in the ruling coalition in 1996-98 and was happy with allocations. The Left Front ruled West Bengal for decades but never proposed auctions of the state’s coal. Rather than call for Singh’s head, all parties should be saying, “Hum sab chor hain” (we are all thieves).

The methodology of the CAG is faulty. It calculates coal profitability in 2011, assumes similar profitability for all production through a mine’s lifetime, and presents the resultant calculation as the sum companies would have bid had there been auctions. Sorry, but in earlier years coal prices were far lower, and companies would have bid far less. Besides, the net present value of future profits must be discounted by a reasonable rate of interest, say 12%. On this basis, a profit of Rs 100 ten years hence is worth only Rs 40 or so today. However, whatever its mathematical shortcomings, the CAG is right in calling for auctions in the future.

The first CAG draft calculated a much bigger loss of Rs 10.8 lakh crore. That has now been slashed by nine-tenth, by leaving out allocations to government-owned companies. But why? The larger figure drives home the point that enormous revenues have been lost through free allocations to Coal India and other government companies. These sums have not been clawed back through higher profits. Rather, they have been dissipated partly in cheap power and partly in waste and inefficiency. Losses ascribable to government companies are nine times as high as those ascribable to private companies. Sadly, people in the media and politics seem to think that public sector waste is acceptable, while corruption is not. In fact, public sector waste has been far greater than corruption, and has done much more to keep India impoverished and backward.

The CAG seems to think that coal profitability automatically means a high auction price. No, this depends critically on how many people are allowed to bid and with what conditions. The problem in coal is that private mines are not permitted for commercial sales. Only captive mines are allowed for industries using coal (steel, power etc). This automatically limits the number of bidders per mine, and therefore lowers auction prices. The CAG should have said that the refusal of all political parties to open up commercial mining has been a huge scam costing enormous sums. The Left Front is the biggest culprit on opposing private sector mining, and is therefore especially culpable for revenue losses.

The public is resigned, sadly, to all sorts of political controls and allocations in the holy name of the people, which are then used for kickbacks and building patronage networks. We need to end the evil of discretionary allocations by ministers in every sector. We need auctions in profit-oriented cases, and allotment by lottery where the government wants low prices.

What do you think?