NDA's coal block policy and new regulations face critical questions

Did consumers and state governments benefit from it? Or did the private sector gain more through the back door?

On April 12, Chhattisgarh’s newly elected chief minister Bhupesh Baghel wrote a letter to Prime Minister Narendra Modi claiming that the Centre’s coal block policy could cause his state to lose potential revenue of Rs 9 trillion over the life of the coal blocks in its geography. At the same time, two recent public interest litigations (PILs) have questioned the handing over of these allocated coal blocks by state power companies to the private sector through secretive mining, development and operation (MDO) contracts.

Losses aside, Baghel’s letter and the PILs raise policy-level questions that have gone unasked for the four years since the NDA government introduced the coal allocation and auction regulatory framework. This framework came after the Supreme Court in August 2014 cancelled the allocation of 214 coal blocks to the private sector and state power producing companies under the previous United Progressive Alliance (UPA). 

The NDA’s framework introduced coal block auctions for the private sector. But it also legalised what the Supreme Court had found was not permitted under the previous regulatory regime: Coal block allocations to state PSUs which could then hand them over to the private sector through MDO contracts.

Though the initial focus was on auctions, the government has ended up with more allocated blocks (58) than auctioned ones (31). It is this allocation policy that Baghel has questioned. 

This month, the Supreme Court accepted and sent notices on a PIL filed by a Chhattisgarh-based citizen, Dinesh Kumar Soni, challenging the nature of MDO contracts signed by the Rajasthan government (when the state was under the BJP) with the Adani group handing over some coal blocks it secured in Chhattisgarh. The Union government, Rajasthan state government (now Congress-ruled) and the Adani group are yet to respond to the notice. The Delhi-based NGO Common Cause (which had filed the earlier case against UPA-era coal allocations) filed a PIL on a similar case in a December 2018.

Soni’s PIL challenges the manner in which the coal blocks were re-allocated to Rajasthan Rajya Vidyut Utpadan Nigam Ltd (RRVUNL) after they had been once cancelled by the Supreme Court. RRVUNL handed over the control of the blocks to the Adani group through joint ventures (JVs) that had been set up before the Supreme Court’s 2014 cancellation order. 

The litigant has alleged that the MDO contract violates the law and the Supreme Court order. They have also alleged that in one case the contract predates the Supreme Court order cancelling UPA-era allocations and holding such JV agreements illegal.

They claim the state PSU ends up paying more for the coal from its own block than it would have buying from a Coal India subsidiary, advantaging the private company. In one JV for which some details of the contract are in the public domain, the petitioners allege the state PSU would pay Rs 275 per tonne above the rates at which South Eastern Collieries provides a higher grade of coal. Additionally, the JV would earn more at the cost of the PSU by selling coal rejects. The litigant has alleged that the JV, in one mine alone, would end up making a profit of Rs 7,557 crore over a 30-year period at the cost to the state power company. 

Baghel, on the other hand, has said that keeping a low reserve price (on top of the royalty) for the blocks allocated to the state PSUs causes loss to the state governments under whose jurisdiction the blocks fall. He has contended that states where the blocks are located should have both a say in the allocation of blocks to other states as well as the right of first refusal. 

Additionally, he has demanded that the reserve price for such blocks be raised from Rs 100 per tonne to at least Rs 500 per tonne or match the average premium secured when private players bid directly for the blocks. The premium for the coal blocks auctioned in the previous years ranged between Rs 2,291 and Rs 3,502 per tonne. 

The NDA’s coal block policy and attendant new regulations were intended to open the coal sector to a transparent regime and private mining through upfront bidding, and cheaper allocations were expected to pass on the benefits to state power-producing PSUs and power consumers. 

Instead, so far, it has led to the private sector preferring to get into the coal business through the backdoor via MDO contracts, for which the government has provided a veil of secrecy by expressly putting them outside the purview of the Right to Information. 

Mining companies see huge potential from the MDO route. The Adani group made Rs 8.63 billion (EBITDA) from the state and central government coal MDO contracts in 2017-18, according to the company’s report to its investors. This was from a year of mining the 2.1 billion tonnes of reserves it has under MDO contracts. It believes the total MDO business would corner 52 billion tonnes of coal reserves. 

Baghel’s letter is unlikely to see a response from the incumbent Central government at this stage. But the PILs bring an indirect challenge to the secretive MDO contracting route. The fundamental questions they raise could soon lead to disclosure by both the Union government and potentially the private company of the nature and contents of such contracts. That could help usher in a critical review of the NDA’s coal allocation regime.

MINE OVER MATTER

| The NDA’s framework introduced coal block auctions for the private sector 

| The policy also legalised allocations to state PSUs which could hand them over to the private sector through MDO contracts 

| More blocks allocated (58) than auctioned (31)

| Chhattisgarh chief minister writes letter to Modi saying the state could lose revenue of Rs 9 trillion owing to MDOs

| Two PILs challenge the nature of MDO contracts between Rajasthan government and the Adani group over coal blocks the former secured in Chhattisgarh 

| PIL states that PSUs end up paying more for coal than it would have buying from a Coal India subsidiary

| MDO contracts kept outside the Right to Information law