Coalgate uproar is overdone

What to privatise, when to privatise and how to privatise are amongst the important policy questions in the transition from state to market. The uproar over Coalgate tells us, as the uproar over the sale of 2G spectrum did earlier, that India is still learning how these questions are best addressed.

Privatisation is not primarily about raising resources for the government. It is about improving efficiency in the economy. Most people believe that the private sector is always more efficient than the government and that the government has 'no business to be in business'.

The literature on privatisation suggests that the reality is rather more nuanced. For instance, in regulated industries, there is not much of a difference in efficiency between the two sectors. Moreover, privatisation works only when certain stringent conditions are met: the sale of assets happens through an efficient auction, there is adequate competition and institutions are strong. Before rushing to judgement on Coalgate, it is worth examining how some of these considerations would apply to the sale of a natural resource, such as coal.

Coal mining is overwhelmingly the responsibility of Coal India Limited (CIL). The first question to ask is whether it is CIL's inefficiency that warrants the entry of private players. As the CAG report notes, CIL has done a good job of meeting its internal targets but fallen short of the Planning Commission's higher targets. This, however, cannot be ascribed to inefficiency on the part of CIL.

CIL has faced several obstacles in mining coal, for instance, rail links from mining areas were not available nor was heavy earth-moving equipment. Land acquisition and environment clearances posed serious hurdles. For these very reasons, several private parties have not been able to make much headway with the blocks taken away from CIL (against its wishes) and allotted to them.

Secondly, since competition is more important than ownership, it would have been sensible to first restructure CIL and create competitive conditions within the public sector itself. CIL should have been listed long before it was in 2010. Some of its subsidiaries might have been spun off into competing, listed companies.

Thirdly, we need to recognise that CIL is able to supply coal at a discount of 26-77% to the international price. This has implications for private sector entry into the sector. If bidding is to be truly competitive, we have to allow international bidders. This has the potential to raise coal prices to international levels. If, on the other hand, we wish to regulate coal prices, there may not be enough bidders and the revenues accruing to the government would be much lower. Moreover, since such an auction would be inefficient, the fundamental objective of achieving efficiency in the coal sector itself may be defeated.

Turn now to the issues involved in Coalgate. The CAG has said that the coal blocks for captive mining should have been allocated on the basis of competitive bidding. Had this been done, it could well have raised the coal price at captive mines to the price of imports.

In computing the net gain to private parties, the CAG has used the average sale price of CIL in 2010-11. The CAG has not discounted the stream of net benefit and it has been criticised on this account. The discounted value comes to Rs 58,000 crore (assuming a life of 30 years for a mine and the discount rate of 10% used by the CAG in the case of the Delhi airport) or an average value of Rs 1,027 crore for 57 private mines. The CAG's higher estimate of net gain, Rs 1,85,591 crore, can be justified only under the assumption that the sale price of coal would catch up with international prices.

The figure of Rs 1,027 crore is an average and it is a theoretical upper limit based on the assumption that bidding would be truly competitive. For a given mine, there is considerable uncertainty as to extractable reserves, the cost of mining, the quality of coal and the time taken for regulatory clearances. In many cases, the bids would be much lower; in some, there may not be bidders at all.

Any windfall gains on the mines would be reflected in profits made in the end-uses and would be taxed. The notional loss to government is thus almost certainly way below Rs 58,000 crore.

It was open to the government to attempt competitive bidding for a few mines, subject to a reserve price (and using the price of coal as a bid parameter). If the response had been weak, it would have been better placed to resort to allocations. However, time was of the essence. There was concern about the impact of competitive bidding on coal prices. Legislation was thought necessary, and enacting it would take time.

These are valid reasons for going down the allocation route. Where the government went wrong was in not following transparent criteria in making allocations. We know now that several political parties were complicit in the manipulation of allocations. It does not follow, however, that the allocation policy per se was flawed.

The government has justified the first-come-first-served policy in the sale of 2G spectrum on the ground that it helped keep the rates on mobile telephony low.

A similar case can be made for the allocation of coal blocks. In the design of privatisation, a choice has often to be made between revenue maximisation and other objectives such as keeping the price to the end-user low. It does not make sense to cry 'scam' whenever the government opts for the latter.