Coal block auction: Performance guarantee could keep small players out

CMPDA, mining guidelines, includes compliance orders relating to health, safety, welfare, social security and minimum wages for workers

Coal blocks will no longer be given free for end-use projects. This is because the government has decided to take upfront payments in three instalments from successful bidders, along with a performance guarantee equivalent to year’s royalty and annual income from the mine with peak rated capacity, and the final offer price as the basis of calculation.

Besides, in possibly the first such clause in a contract for natural resources, an anti-corruption provision has been included. Any violation in this regard will lead to cancellation of the coal mine development and production agreement (CMDPA).

The CMDPA, which states the terms and conditions for successful bidders for coal blocks in the coming e-auction, was released by the government on Friday. Among its provisions are compliance orders relating to health, safety, welfare, social security and minimum wages for workers. Successful bidders are mandated to report periodically to nominated authorities and state governments, during the various stages of mining.

“A successful bidder shall conduct mining operations at the coal mine, in accordance with the milestones or ‘efficiency parameters’. Failure to comply with the efficiency parameters will result in appropriation of the performance security,” said Vivek Bhardwaj, joint secretary in the ministry of coal and the nominated authority for conducting the coal block e-auction under the coal ordinance.

Kalpana Jain, senior director, Deloitte, said the performance guarantee “appears onerous” and could block working capital. “It will keep small players away from bidding.” On the anti-corruption provision, she said though it was a good move, various situations should be recognised. “We create laws that are open to interpretations. So, there should be clarity on what constitutes corruption.”

The provisions of the CMDPA will be included in the mining leases. The agreement will also take into account an event of force majeure. “The agreement provides for conditions of vesting and non-compliance with the provisions of the CMPDA to result in withdrawal/cancellation of the vesting order,” said Bhardwaj.

The conditions for a performance bank guarantee and the format for this is part of the CMDPA. The agreement also contains provisions of warranties and indemnities by successful bidders. A particular clause contains a list of events on which the agreement might be terminated, such as failure to pay the upfront amount and additional levy, non-compliance with anti-corruption laws and failure to pay monthly payments.

CONDITIONS APPLY

• CMDPA  includes clause mandating the successful bidder to comply with all the applicable laws in relation to health, safety, welfare, minimum wages for the workers, payment of upfront amount in three instalments and appropriation of bank guarantee in case of failure, anti-corruption provisions
   
• The agreement also provides for withdrawal/cancellation of vesting order in the event of non-compliance with the provisions of the CMPDA