Breakingviews - Coalgate fiasco could be an opportunity

MUMBAI Tue Aug 28, 2012 3:00pm IST

A labourer loads coal onto a truck at a coal yard on the outskirts of Jammu August 24, 2012. REUTERS/Mukesh Gupta

A labourer loads coal onto a truck at a coal yard on the outskirts of Jammu August 24, 2012.

Credit: Reuters/Mukesh Gupta

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MUMBAI (Reuters Breakingviews) - New Delhi needs a new coal policy. The government's flawed decision to hand mines to individual firms has caused political gridlock. It has also failed to get the black stuff out of the ground. A better approach would be to break Coal India's monopoly.

Giving away coal blocks to corporate giants on the cheap, as the government did between 2004 and 2009, was clearly a mistake. If it can be proven that the process was also corrupt -- as the opposition BJP party alleges -- then heads should roll.

However, the policy was also a failure: most of the coal in question remains in the ground. That's because the companies involved lacked the scale and expertise to exploit them.

The flop undermines the government's original justification for giving away the coal, which was to deal with a shortage of supply from Coal India (COAL.NS) by giving key industries direct access to their own mines.

On the plus side, however, it gives the government a chance to correct its mistake by insisting that the blocks are returned and properly auctioned. That would allow it to claw back some of the $33 billion that the Comptroller and Auditor General (CAG) reckons was lost as a result of the giveaway.

Coal India's monopoly status is at the heart of the problem. The only way to viably increase supply would be to stimulate rivals that can viably challenge the incumbent. One option would be to split Coal India into smaller parts. Another would be to bring in private sector competitors, as the government has successfully done in the oil sector.

The sequencing of such a change will be crucial. Before the government can auction its blocks, it will need to pass laws which break Coal India's monopoly, and give new rivals time to become commercially viable.

In the long run, such a reform would increase supply and bring much needed investment. It would also allow the government to raise cash from the auction and the taxes it could subsequently levy on new competitors. Such a reform would not be straightforward. But the "coalgate" fiasco may provide India with an opportunity to push it through.

CONTEXT NEWS

- Chanting politicians drowned out Manmohan Singh on 27 August as the prime minister sought to defend his government's role in an affair dubbed "coalgate" that has paralysed parliament and created a sense of political crisis.

- "Coalgate" refers to the Comptroller and Auditor General (CAG) report published on August 17 that questioned the government's practice of awarding coal mining concessions to companies without competitive bidding, potentially costing the treasury billions of dollars in lost revenues. The CAG alleged that the government's under-priced sale of coal blocks may have cost the exchequer potential revenues of $33 billion.

- In his written statement, Singh denied his government had done anything wrong, blamed the delay in introducing competitive bidding for coalfields on resistance from major coal-rich states that were ruled by opposition parties and said the findings of the state auditor were "clearly disputable".

- Singh said the government had continued with the allocation system for coal blocks while preparing to make legislative changes to avoid "lower energy production, lower GDP growth and also lower revenues".

- The BJP has disrupted parliament for more than a week, refusing to stop until Singh steps down.

- PM statement: link.reuters.com/wyp32t

(Editing by Peter Thal Larsen and Katrina Hamlin)

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

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