Let’s 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’s 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.
Given 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.
Stress over the economy
A 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 — government, private owners, and banks — 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.
This 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.
Coupled with this would be the government’s 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.
This 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.
For example, he questioned the government’s insistence on not capping the future power tariffs. “If 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,” he said.
Economists said that increases in power tariffs would have a multiplier effect on all the three broad sectors — 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.
Another 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.
Extending the net present value argument to each of the ten annual instalments — cumulatively Rs 1,20,000 crore — paid from year 21 to 30, its worth at today’s 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’t as successful as it seemed.
Stress over future auctions
After 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’t happened till now, the auctions of other minerals might result in similar confusion in the future.
An 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’s help if required, this scenario could lead to complete chaos. In fact, many mineral rich states were apprehensive to conduct their own auctions.
Economists 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.
Many 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’t lead to policy paralysis, or policy makeover, in the near future.
editor@tehelka.com
