{"id":250561,"date":"2015-08-30T13:05:46","date_gmt":"2015-08-30T07:35:46","guid":{"rendered":"http:\/\/www.tehelka.com\/?p=250561"},"modified":"2015-08-30T13:05:46","modified_gmt":"2015-08-30T07:35:46","slug":"winners-be-damned","status":"publish","type":"post","link":"https:\/\/tehelka.com\/winners-be-damned\/","title":{"rendered":"Winners be damned"},"content":{"rendered":"

\"Photo:
Photo: Vijay Pandey<\/em><\/figcaption><\/figure>
\nIt was the classic win-win situation. The government raked in Rs 4,00,000 crore through the auction and allocation of coal mines early this year. The states would receive the bulk of this money over the next 30 years. India gained as the coal produced would lead to higher production of power, a key sector that could rev up the economy. The winning bidders felt confident that the allocations would not be unilaterally cancelled like the Supreme Court did with the previous allotments.
\nFor the people, the auction hinted at the advent of transparent and non-corrupt governance, which then boosted the now-dented image of Prime Minister Narendra Modi. Everyone seemed pleased with the results of the auction. The coal minister, Piyush Goyal, claimed that the government got the \u201chonest value of the coal\u201d. He added that the auction was \u201can open marketplace, the most transparent thing, all of you saw it minute by minute, second by second\u201d.
\nWithin months, however, the mindset and attitude changed. Private players hinted that the aggressive bidding would lead to problems in a few years. It would make some projects unviable, put further stress on banks\u2019 bad loans, hike the cost of power (which used coal as fuel), and force policy changes. More important, the lessons learnt from the auction would change the nature of future bidding, and impact the proposed auctions of iron ore and other minerals.
\nA few critics said that the auction was as opaque as the previous regimes\u2019 allotment on a discretionary basis. The auction, like the earlier policy, was restricted to a few bidders, there was lack of transparency in valuations, and it led to confusion in the coal and power (user) sectors. As one of them said, \u201cUPA-1 and 2 were about crony capitalism that helped individuals. NDA-2 is about policy-led crony capitalism that will show its horns over the next few years.\u201d
\nWhy is the once-hyped auction being flayed? What changed the manner in which select sections thought about the auction? Why did it become difficult for the government to defend the auction? And how will the experiences in coal impact the auction of other mines?
\nStress over viability <\/span><\/strong>
\nThere were several factors that could transform the captive coal blocks, and the allied power plants (as users), into unviable entities. The first was that in some cases, the bidders went overboard, especially in the case of reverse auction. Reverse bidding was one when there was a ceiling price that reflected the notional value of the coal, say, Rs 500 a tonne. The bidders offered discounts on this price, say, Rs 100 or Rs 200. In simple terms, they priced the coal at Rs 300 or Rs 400.
\nIf the discounts were manageable, the situation wouldn\u2019t be grim. Some bidders went crazy. An article in www.scroll.in argued that Essar Power, a winning bidder, not only discounted the notional value to zero but, in addition, offered to pay Rs 1,110 per tonne extra to the government. Its cost of coal came to Rs 1,500 a tonne if one assumed the actual expenses to be Rs 400 a tonne. Clearly, it would soon become unviable, or its power tariff would soar through the sky.
\nSecond, the idea of a captive block is to have it near the user plant to cut down on transportation and other costs. However, in the coal auction, several bidders got coal blocks that were situated far away from their power units. Since the government does not allow sharing or swapping of coal among the miners, the fortunes of such coal-power entities would be the same as that of Essar Power. They would soon become unviable or forced to hike their tariff.
\nFinally, there were several business groups, which had several coal blocks, before the Supreme Court cancelled over 200 allocations in 2014. Some of these groups had invested in the allied user units, like power and steel. During the 2015 auction, they failed to win the earlier blocks; for example, Jindal Group\u2019s hold over coal blocks came down from 7-8 to just 1. It was obvious that several investments that it had made in the past few years would turn sticky.
\nStress over bad loans<\/span><\/strong>
\nThe Jindal case brings us to the larger question of looming and increasing nonperforming assets (NPAs) in the banking sector, especially in public sector banks. According to the finance ministry, the magnitude of gross NPAs stood at Rs 2,67,000 crore as on 31 March 2015. Credit rating agencies predict the quantum to rise by March 2016; they estimate the situation to get worse before it gets better. The central bank has issued several warnings on NPAs.
\nIf one includes stressed debt, or loans that could go bad in the near future, the scenario is worse. Standard and Poor\u2019s, a global rating agency, has estimated that the level of stressed loans would zoom to over Rs 8,00,000 crore by March 2016. A sizeable percentage of this amount would turn into NPAs since corporate balance sheets in India are highly leveraged. Public sector banks are more vulnerable as their NPAs\u2019 levels were over 30 percent higher than their private sector counterparts.
\nBanks are especially concerned about the money they have lent to crucial sectors such as coal, power and steel. An estimated Rs 1,50,000 debt in the power sector could become NPAs over the next 12 months. A similar thing may happen in the coal sector, where the loans at over Rs 2,50,000 crore. The coal auction might prove to be another nail in the NPAs\u2019 coffin.
\nTo begin, there was no clarity on how the banks would deal with loans given to coal miners who failed to win these blocks during the auction. Such owners would not be in a position to repay since they lost the mines. In such cases, the banks could not transfer the loans to the new owners, who would obviously not wish to be saddled with them. The banks could not insist that the old owners repay their loans from earnings from the coal-user plants, like power or steel.
\n
\n
\"Flawed
Flawed auction<\/strong> Policy makers ignored past experience while allocating new coal blocks. Photo: Tehelka Archives<\/em><\/figcaption><\/figure>
\nLet\u2019s not forget that the lack of access to fuel for the old owners could impact their allied businesses. For example, if a captive miner had planned to use the coal to fuel his power plant, the latter\u2019s viability would be in danger. The reason: without the mines, they would need to buy expensive domestic or imported coal from the market place. This would drive up power prices. If they failed to renegotiate the tariff with the electricity buyers, they would be in trouble.
\nGiven their past experiences, banks have become cagey to lend to the coal and power sectors. Thus, the new owners would find it difficult to access finances required to mine the coal. They would then be forced to seek expensive sources, which could impact their business plans. Although the public sector banks publicly said that they would help the new owners to finance their projects, the reality was different. The banks would rather recover past loans than dole out new ones.
\nStress over the economy<\/strong><\/span>
\nA combination of a possibility of higher NPAs, especially in coal and steel sectors, and chances of several projects becoming unviable might have a huge impact on economic growth. The first reaction among most stakeholders \u2014 government, private owners, and banks \u2014 would be to prevent the private businesses from going down under. Hence, the policies would be tweaked to give leeway to the private players to give them adequate breathing space.
\nThis has happened in cases where private players overbid to access scarce natural resources like coal and spectrum. The telecom example was a telling one. In the 1990s, many bidders offered fantastic prices during the mobile licence auctions. Many were unable to pay and had to give up their licences. The survivors went into a financial spin, claimed that they would default on their loans, and forced the government to change the policy. Not once but several times.
\nCoupled with this would be the government\u2019s compulsion to allow huge hikes in power tariffs. Unlike the telecom sector, where the government could ensure enough competition, the situation in coal and power is different. In due course, predicted a few observers, the linked coal-power entities would approach the electricity regulators to clamour for price increases. This happened even when the captive coal blocks were allocated on a discretionary basis at low prices.
\nThis is the reason why some critics dubbed the coal auction as policy-driven case of crony capitalism. In this scenario, the flaws in the initial policy would enable the private players to collectively earn huge incentives, concessions and possible profits after a few years. One of the critics claimed that while the auction itself was quite transparent, the assumptions had gaping holes.
\nFor example, he questioned the government\u2019s insistence on not capping the future power tariffs. \u201cIf low power charges and high economic growth were the objectives, the government should have insisted that only the bidders who agreed to sell power in a specific price range would be allowed to participate in the auction. But by keeping the prices open, the regime has provided opportunities to the private players to ask for concessions and price hikes later,\u201d he said.
\nEconomists said that increases in power tariffs would have a multiplier effect on all the three broad sectors \u2014 manufacturing, agriculture and services. They added that if there were no price hikes, but a decline in power production due to closure of unviable plants, it could dent the economy by half a percentage point. Either way, the loser would be economic growth. Over the next few years, such negative trends could have political ramifications too.
\nAnother economic ingredient that is generally not considered or understood is that the Rs 4,00,000 crore from coal auction would be paid in equal annual instalments over the next 30 years, apart from the 10 percent upfront payments. Thus, the owners would pay Rs 12,000 crore a year, or Rs 3,60,000 crore over the next 30 years. If one calculated the net present value of the Rs 12,000 crore that would be paid in the 30th year, it would come to under 2,800 crore at an annual inflation rate of five percent. The reason: inflation would corrode the value of the rupee each year.
\nExtending the net present value argument to each of the ten annual instalments \u2014 cumulatively Rs 1,20,000 crore \u2014 paid from year 21 to 30, its worth at today\u2019s prices would be only Rs 35,000 crore. What the government actually earned, and what the states would get, was much less than the figure of Rs 4,00,000 crore. Clearly, the auction wasn\u2019t as successful as it seemed.
\nStress over future auctions<\/span><\/strong>
\nAfter the seeming success of the initial coal auction, the government further auctioned a few more coal blocks and grandiosely announced that it would similarly allot mines of other minerals like iron ore. Critics questioned this decision since they felt that the policy makers should have learnt from past experiences and tweaked the policy. Since that hasn\u2019t happened till now, the auctions of other minerals might result in similar confusion in the future.
\nAn additional obstacle in the case of iron ore was that those mines were owned by the respective state governments. Hence, they would need to auction such mines. The states, unlike the Centre, had no experience in doing so. Although the Centre felt that they would learn on their own, and seek the former\u2019s help if required, this scenario could lead to complete chaos. In fact, many mineral rich states were apprehensive to conduct their own auctions.
\nEconomists believe that once the states conducted the auctions, there was a grave danger that collective crony capitalism could become the norm. Each state could tweak the auction rules in a manner to favour a select group of businessmen. Moreover, due to the lack of experience of the states, the business groups might take the former for a ride. Transparency would again become a victim, and corruption could raise its ugly head.
\nMany observers felt that while auction was a step in the right direction, the Centre and states needed to make several course corrections. Instead of shouting from their rooftops about their success, they should focus on how to make the process better. Instead of making bold claims that the regime had vanquished corruption, it should think of how to ensure that the policy flaws don\u2019t lead to policy paralysis, or policy makeover, in the near future.
\neditor@tehelka.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The much-touted success of coal block auctions may turn winners, lenders and the economy into losers in the near future. It may even derail future auctions.<\/p>\n","protected":false},"author":78,"featured_media":250565,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[56],"tags":[9385,9386,9387,895,9271,3820,1277,9388,9389,9384],"_links":{"self":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/posts\/250561"}],"collection":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/users\/78"}],"replies":[{"embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/comments?post=250561"}],"version-history":[{"count":0,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/posts\/250561\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/"}],"wp:attachment":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/media?parent=250561"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/categories?post=250561"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/tags?post=250561"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}