Winners be damned

Photo: Vijay Pandey
Photo: Vijay Pandey

It 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.
For 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 “honest value of the coal”. He added that the auction was “an open marketplace, the most transparent thing, all of you saw it minute by minute, second by second”.
Within 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’ 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.
A few critics said that the auction was as opaque as the previous regimes’ 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, “UPA-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.”
Why 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?
Stress over viability
There 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.
If the discounts were manageable, the situation wouldn’t be grim. Some bidders went crazy. An article 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.
Second, 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.
Finally, 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’s 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.
Stress over bad loans
The 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.
If one includes stressed debt, or loans that could go bad in the near future, the scenario is worse. Standard and Poor’s, 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’ levels were over 30 percent higher than their private sector counterparts.
Banks 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’ coffin.
To 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.