Government gains, country loses

Government gains, country loses by Kapil Sibal
The PM’s expectations are not likely to be realised. In making this statement, he also failed to grasp the purpose behind exploiting natural resources, coal being a vital source of energy, fundamental to industrial production and touching every sector of the economy. (Source: PTI)

The Prime Minister, while thanking the President for his address, made a predictable political speech ridiculing the people-centric policies of the UPA, rubbing salt into fresh wounds by reminding the Congress of its historic drubbing at the polls. He is a master of rhetoric. But his well-designed speech exposed his lack of understanding of highly complex policy issues. Let me just take one example to illustrate this.

In the recent auctions of coal blocks pursuant to the Coal Mines (Special Provisions) Second Ordinance, 2014, the PM sought to support the Comptroller and Auditor General by indicating that the UPA, in allocating coal blocks to industry, had caused loss much beyond the figure of Rs1,85,000 crore. He indicated that the recent auction of just 19 blocks had fetched almost Rs 1 lakh crore for the states and after 204 blocks are auctioned, the mop-up for states would be phenomenal. The bid amounts include royalty to be paid to the exchequer. Perhaps the PM is not aware of the fact that the coal blocks auctioned so far are either operational or near-operational. The other blocks, if put to auction, will not attract the kind of bids now offered. Virgin blocks of coal have a long gestation period for the winning of the mineral.

Government gains, country loses by Kapil Sibal

Illustration by CR Sasikumar

The PM’s expectations are not likely to be realised. In making this statement, he also failed to grasp the purpose behind exploiting natural resources, coal being a vital source of energy, fundamental to industrial production and touching every sector of the economy. Without an optimum and continuous supply of coal, power, steel and cement, along with other sectors of the economy, will be negatively impacted. Revenue maximisation by way of auction cannot possibly be the only purpose behind the allocation of natural resources. If land for educational institutions or for healthcare were to be auctioned, say in a city like Delhi, the private sector will be able to set up neither schools for education nor hospitals for healthcare. Natural resources must be so distributed, by way of auction or otherwise, that they serve a larger public purpose. The optimal use of natural resources can be made only if there is a well-thought-out policy framework for their exploitation towards a particular end use.

The ordinance enunciates, in its preamble, the primary objective of achieving energy security, identifying three priority sectors — power, steel and cement — the backbone of any emerging economy. The sole purpose of these badly designed auctions is to maximise revenues and not to revitalise these sectors. The architecture of these auctions should, in fact, have been designed to meet the competing demands of the three priority sectors. Every entrepreneur, deeply involved in each of these sectors, would be willing to pay any price to win an allocation through auction to access coal that costs much less after mining it than its import price. Not winning a particular coal block at the auction and having to access imported coal, along with other costs, would make an enterprise non-competitive. If, through these auctions, coal blocks are not equitably distributed among these priority sectors, the very rationale of the ordinance would have been defeated. But that is only one part of the problem.

The auction price to be paid per metric tonne of coal will require industry to borrow from banks. Industry is expected to recoup that cost and service loans in the course of its operations. Apart from loans from banks, industry would require capital investment to win coal embedded in the bowels of the earth. Having paid to the government a high auction price, most industries will find it difficult to raise further capital to mine the coal allocated. Servicing borrowings from banks will become a problem, yet another reason for a rising number of non-performing assets. Auctions per se are not, therefore, a panacea for the public purpose of revitalising the priority sectors identified in the ordinance.

High borrowings from banks require industry’s ability to invest in the enterprise for optimum productivity.

Experience has shown that the payment of high auction prices may serve the government well but seldom serves the public good. In the telecom sector, the government fetched almost Rs 1 lakh crore in the auction of 3G spectrum. But the sector did not have the capacity to invest in infrastructure to provide 3G services to the common citizen. The government earned, but the “aam aadmi” lost.

The earlier policy of a threshold payment and a profit-sharing arrangement with the government, pursuant to the allocation of spectrum, served the public well. That is why the allocation of spectrum in 2G was an enormous success. Industry paid back to the government in the form of a revenue share. Because of the high auction price fetched by the government for 3G, the telecom sector could not provide 3G services at affordable rates. I suspect the same is going to happen to vital sectors of the economy such as power, steel and cement in future.

The auction so far has demonstrated that though the government may have profited, these vital sectors of the economy will be starved of coal. Most of the coal blocks have been won by industry that produces neither steel nor cement or power. The most successful bidders in the auction manufacture aluminium. The result is that the share of the steel sector, which was allocated 65 per cent of the coal blocks before the auction, has been reduced to 25 per cent after the auction. The aluminium industry, which had been allocated 2 per cent of the coal blocks, has increased its share to 45 per cent. The very purpose for which the ordinance was promulgated has been defeated. Manufacturers of aluminium have benefited. The steel, cement and power sectors have lost out.

I have demonstrated the above only to suggest how complex the process of auctioning of resources vital to the economy is and how difficult it is to get it right. For the PM to say that the few coal blocks auctioned thus far have yielded windfall gains of Rs 1 lakh crore to the government shows an utter lack of understanding of the rationale behind auctions and the public purpose that the use of natural resources is meant to serve. Besides, the high price of auctions will increase the burden on the common man; he will have to pay more per metric tonne of steel, which in turn will fuel inflation. If the high price of auctions does not serve the larger public purpose of producing more electricity and enhancing steel and cement production, the government may have gained, but the country would have lost. When in opposition, such rhetoric is fine. But to do it as PM only diminishes the stature of the office.