An Empowered Group of Ministers (EGoM) on Saturday chose not to reopen the question of what Reliance Power should do with the excess coal from its Sasan ultra-mega power plant (UMPP) in Madhya Pradesh. The EGoM had, in 2008, used its discretion to allow Reliance Power to divert coal produced from Sasan’s captive mines to another power project it owned in the same state, Chitrangi. The question of captive coal has become politically salient after reports that the Comptroller and Auditor General (CAG) had concluded in its draft report that the power to allocate coal blocks led to windfall profits for private firms. A losing bidder for the Sasan UMPP, Tata Power, had earlier moved the Delhi High Court on the question of diverting coal produced from Sasan’s captive mines. The petition, dismissed by the high court in 2009, is now before the Supreme Court.
The government’s reasoning is simple. It believes that captive coal should be used to ensure that power is produced cheaply and consistently. The Reliance Power plant receiving the excess coal, Chitrangi, is selling its power in the open market — and the claim is that the pressures of competition over power tariffs mean that it doesn’t matter whether or not the inputs are paid for. This reasoning is fatally flawed, in that it does not answer whether or not the private company receiving captive blocks – in this case, Reliance Power – has received a windfall gain thanks to government discretion. It is obvious and incontestable that being gifted inputs by the government at prices lower than what prevail in the open market causes a significant distortion. It also gives a competitive advantage to the successful allottee that other firms can justifiably complain about.
Even more importantly, the coal blocks attached to Sasan were primarily meant for the UMPP, not for any other project. But it was in the allocation letter for Sasan where the government clarified that “no coal should be sold, delivered, transferred or disposed of except for the stated captive mining purposes, except with the previous approval of the central government on a case-to-case basis”. If producers had bid not just for the power generation project, but for the right to use the captive coal as they saw fit, the bids might well have been considerably different. The one thing certain to undermine the use of auctions as a method of price discovery is to allow successful bidders to have the leeway of seeking from the government discretionary changes to the contract they’ve won. In that case, the politically connected firm can always underbid, knowing it can turn terms to its advantage later. The entire argument in favour of auctions being an efficient, apolitical way to allocate natural resources disappears in an instant. The EGoM’s 2008 decision, thus, was an extremely dangerous precedent. The CAG report, whatever its other flaws, should have served as a necessary reminder of the fact that the 2008 decision in favour of Reliance Power should have been overturned. Instead, the EGoM has backed away from doing the right thing. More than just a single UMPP is at stake: what is being risked is the integrity of the auction mechanism itself. Given that the allocation of natural resources has become so politically and economically sensitive, and the justifiable outrage felt by many at the use of political connections and influence to gain access to resources at below-market rates, this decision is severely mistaken, and should be reversed.