COLUMN: As usual Mr Sibal, you are wrong!

As a loyal foot soldier Sibal continues to defend the indefensible, writes M R Venkatesh.

"If that logic were right, then it is true of giving away any public asset at a lower price or an institutional price or for free. Whether it is land for a hospital, land for a school, air waves for the telecom sector." That was Kapil Sibal articulating his point in (mock?) seriousness in a chat show. And the logic referred to at the outset? It was obviously about auctioning coal blocks.

What is interesting is that he added: "If that is the case, the government should be in the business of auctioning everything so that people in this country should pay and so that inflation should be 15 per cent and nobody can afford to live. So, I think this is a wrong way of looking at it."

In short, the counter-logic of Sibal is that if the government had gone in for auctions, the winner of each auctioned coal block would have loaded his bid price to the final cost of production of power, steel or cement. And that would have had an adverse impact on domestic inflation.

There is a fatal flaw in this argument which Sibal conveniently hides; one that is incomprehensible to sections of our media. Unable to understand the issue, media does not question him. An un-critiqued Sibal, therefore, assumes that his arguments are perfect. And a "perfect" argument by an articulate lawyer spoken in Queen's English - becomes the ultimate defense of our Government.

There is no free lunch in economics

To understand all these, a reference to the extant policy of the Government of India is essential. Accordingly in 1993 by an amendment to the Coal Mines (Nationalisation) Act the Central Government allowed a company to mine coal for captive consumption provided it was engaged (i) production of iron and steel and (ii) generation of power. Further, in 1996, the Government included cement production as an approved end-use for the purpose of captive mining of coal.

And remember that it is only to these three sectors viz., steel, cement and power that the Government of India can, under the extant policy, allot coal. The crux of the issue here is not allotment of coal to these three sectors. Rather it is all about allotting coal blocks for "free" that come under intense scrutiny.

Sibal the senior minister must know (as he must as a senior lawyer) that there is nothing called "free allotment" when it involves governments. Free allotment, readers may note, is not merely restricted to monetary angle alone. A land allotted free for a school or a hospital by the Government comes obviously with a rider of say admitting students free or treating patients at subsidized tariffs as the case may be.

It is pertinent to note that without these riders courts have held such allotments to be arbitrary, and therefore in gross violation of Article 14 of the Constitution. Hence the riders in the first place! 

But what is the conditionality in allocating coal to select players? What are the stipulations placed on the allottees? Nothing, except that the allocation made shall be used to meet the coal requirement of the permitted end use project. Nothing more, nothing less.

As evidence, allottees are expected to have a "legally binding" and "enforceable supply contract." This again happens to be a bogus stipulation as most allottees seem to have entered into phony Memorandum of Understanding with respective state governments by promising to set up steel, cement or power plant, ensured such government recommend their case and got the blocks allotted. 

And in the absence of direct conditionality where the free allotments are measured and benchmarked, Sibal, comes out with this specious logic - free allotment of coal has directly curbed the prices of cement, steel and energy and indirectly to curb overall inflation. It is now his word against yours!

Given this paradigm, isn't it logical to expect when government allots coal for free it should extract something tangible from the allottee? Is it not fair to expect say through a "demonstrable" reduction in prices of cement, steel or power costs wherever government has allotted coal blocks free?

Isn't it a legitimate expectation especially given the fact that coal - a precious natural resource and a significant input material - is offered "free" to these beneficiaries, they should also have been mandated simultaneously by our government to factor this free input in their final output?

All what Sibal says is possible provided one lives in Stalin's Russia where input and input prices were controlled. This is not possible in an economy that is substantially liberalized and significantly integrated with the global economy.

Prices of cement, steel or power are more or less market determined in India with very little or no role of government controlling the same through input costs. And in all these, international supplies especially in case of steel and cement, plays a significant role in determining domestic prices.  

So in effect while one got coal "free" and went about setting up cement, steel or power plants, they had no compulsion to pass this benefit to the consumers - you and me!

Obviously for this reason alone Sibal is wrong. Free coal has nothing to do in the ultimate analysis in determining the selling price of steel, cement or power. Free allotment of coal is free lunch offered to specific allottees by the government. That is all about it.

Free lunch sponsored by the Government of India? Is this the stated policy of the Government of India? Surely, given these angularities in the coal allotment policy, it is quite likely that this will be successfully challenged in a court of law. 

Exposing the fatal flaw

That is not all. Allottees of coal blocks have literally squatted on their allotments.  The policy of the Government of India mandates that the coal production from the captive blocks shall commence within 36 months (42 months in case the area is in   forest land) of the date of allocation in Open case mine and in 48 months (54 months in case   the area fall under forest land) from the date of allocation in Underground mine.   

It is in this connection that the CAG in his Report points out that "production of coal from captive mining was not encouraging. Out of 86 such coal blocks which were to produce 73 MT of coal in 2010-11, only 28 coal blocks which included 15 blocks allotted to private sector, could start production by 31st March 2011 and produce only 34.64 MT of coal during 2010-11" [Para 5.2].

The moot question - why should someone get coal allotted and yet refuse to use the coal? Who benefits by squatting on such allotments? If coal has to be hoarded why get such allotments in the first place? The answer to this could be complex and case sensitive. One plausible reason is that coal was allotted to those who had no intention in using it in the first place.

Some have, in the absence of clear policy guidelines, sold major portion of the shares. This implies ultimate beneficiaries of coal allotment have got coal blocks possibly circumventing the policy guidelines by using front companies. In the alternative the original allottees have scooted making huge premium on such transfers.

Another possible reason is that allottees did not mine despite such "Free" allotment is that it creates an artificial shortage of coal within India, forcing India to import Coal. The demand-supply gap of approximately 50 MT in 2007-08 has now risen to 70 MT in 2010-11. With huge commissions and kickbacks available in import of coal, it is in everyone's interest to adopt this practice. Let the policy be damned.

Such policies, without prohibition on sale of shares, ensured powerful and well-connected people getting coal allotment in their companies and transferring shares in such companies to others (possibly at a premium). Yet another set of allottees ensured that they squatted on the allotment of coal leading to a surge in import of coal to India. This possibly allowed someone to make huge commissions on imports.

Interestingly, Sibal's final argument makes compulsive reading: "And the fundamental issue is when the coal cannot be sold and is used for captive consumption, the loss or gain will occur when electricity is generated and at a certain tariff. It has not occurred earlier. So therefore there is no loss." No Loss? Well does this not sound like the infamous Zero loss theory in the 2G case?  

Whatever be it, no one, definitely not the CAG, is arguing that coal was re-sold and hence by such allotments someone somewhere made huge money on re sales. Rather the argument of the CAG is simple - "Free Allotment" without stipulations resulted in a possible revenue loss to the Government. And since stipulations on end prices are unworkable as demonstrated above, the entire policy of "Free Allotment" was deeply flawed.

Sibal knows this. Yet, as a loyal foot soldier he continues to defend the indefensible. In the process one of the most articulate, well educated and our efficient minister seems to get it wrong yet again. Poor man. One can pity him.

Photograph: Adnan Abidi/Reuters

The author is a Chennai-based Chartered Accountant. He can be contacted at mrv@mrv.net.in