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How the Government might recover more than 8 times the money lost in CoalGate scam

In India, our attention is always on the negative aspect of things. In 2012 the Media was constantly reporting the infamous Coal-Gate scam where in the then Government had allocated coal blocks in an inefficient manner.  The crux of the matter was, while the Government did have a choice to auction the coal blocks, they chose not to, thereby causing massive loss to the country. The Final CAG report pegged the loss at an astounding Rs 1.86 lakh crores, making it one of the biggest scams in India. Finally through court intervention, the Coal allocations were cancelled.

Now the Government has finally begun the process of re-allocating these Coal blocks, in a transparent manner, and by adopting the auction route. Along with this, the Government has taken numerous measures to ensure the best possible result to this auction process. But sadly, the national media has not covered this with the focus it gave the Coal Scam.

The entire bidding system is a bit complicated but very rewarding to the consumer. The Government has introduced reverse bidding for bidding in regulated power. The Government first determines the cost Coal India incurs in extracting and processing the coal. This is called the ceiling price. Bidders take part in a reverse bid to bid the lowest price. For egs: if the Ceiling Price (Cost to Coal India) is Rs 1000, then the winning bid will be lowest bid below Rs 1000. So if there are 2 bidders, A bids Rs 500 and B bids Rs 400, B wins. The effect of this bid is B claims he can process the coal at Rs 400 only, as compared to Rs 1000 incurred by Coal India. Thus the Government pays the bidder only Rs 400 for processing the coal, which would have cost Rs 1000 to Coal India, and the differential Rs 600 cost saving gets passed on to the consumer. 

Another move the Government took was pruning 50% of qualified bidders after opening price bids were received. This creates a fear of premature disqualification and forces the bidders to put forth the best possible price, thus ensuring that bidding is aggressive

Now in the above Reverse Bidding model, there can theoretically be a case where the bid comes to zero i.e. two or more companies can say they will process coal at zero cost, which means they will pass on the entire benefit to the customer (Rs 1000) from above example. To resolve such ties, the Government devised a Forward Bidding mechanism. In reverse bidding we saw what amount the Government must pay the bidders to process coal. Once that comes to zero, the bidders start paying the Government to allow them to process coal! So now, the bid is for who pays the Government the most. For one of the non regulated sector mines, Anil Ambani’s Reliance Cement had to make a bid of Rs 1,402 per tonne, more than nine times the floor price of Rs 150 to bag a Coal block.

Thus, the auction is expected to earn much more than the Rs 1.86 lakh crore, which was lost thanks to the Coal Gate scam. The auction could fetch poor states such as Jharkhand, Odisha, Chhattisgarh, Madhya Pradesh, Maharashtra and West Bengal Rs 15 lakh crore over a 30-year period, or Rs 50,000 crore a year on an average. Coal secretary Anil Swarup said that the current trend seen in the auction makes him believe the revenue could be more than Rs 15 lakh crore. We feel, even if this is being grossly optimistic and even just 20% of this is eventually recovered, that too will be much more than the money lost in the scam.

(With technical inputs from @DevanshiS_)

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Gaurav
Gaurav
co-founder, OpIndia.com

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