Friday, 22 January 2016

IBPS Banking Awareness : know about Coal Auction

Dear expert, here is the IBPS Banking Awareness : know about Coal Auction study notes topic. This topic covered knowledge under IBPS Banking Awareness knowledge series.

know about Coal Auction 

  • The coal gate scam is the allocation of coal blocks to corporates of public centre entities (PSE) and companies and the private sector during the UPA rule under Prime Minister Manmohan Singh's mandate. The government allocates coal blocks through a process of competitive bidding. However, this procedure was not followed and there were discrepancies in its reporting, and the allocations were believed to be arbitrary. The concept of allocation of captive coal blocks through competitive bidding was first announced in 2004.In the mean time, 194 coal blocks were allocated to different government and private parties up to March 31, 2011.
  • The CAG has come to the conclusion that the government's decision to not auction 194 coal blocks between 2004 and 2011 meant that the country lost a huge amount in revenue. The figure was initially believed to be more than Rs 10 lakh crore, but the CAG chose to keep PSUs out of its final report, bringing the figure down to Rs 1.86 lakh crore.
  • The CAG feels the loss could have been avoided, or at least have been lower, as the procedure for auction of the precious natural resource could easily have been put in place by 2006. The failure to do so meant that 25 firms, including Essar Power, Hindalco, Tata Steel, Tata Power and Jindal Steel and Power, received a windfall through coal blocks on nomination basis, instead of competitive bidding. 
  • To bring objectivity and transparency in the allocation and for tapping of a part of benefit for accruing to the allotees of captive coal blocks, On August 25, 2014, the Supreme court passed the judgement, terming all coal allocations between 1993 and 2010 illegal. The apex court pointed out that the scam resulted in the heavy suffering of common good and public interest. 
Here are some important Questions regarding this Chapter which THE ECONOMICS TIMES tried to answers in their opinion section today, We hope this will help you understand this case of crony practices in the Indian Markets.
Q - WHY ARE COAL MINES BEING AUCTIONED?
A - The auction follows the Supreme Court's decision to cancel 204 blocks. The Comptroller & Auditor General had earlier said the government had lost a huge amount of money by allocating the blocks without a proper process.
Q - WHAT ARE THE BIDDING RULES?
A - There is separate bidding for the power sector, where revenue maximisation is not the intention. In the unregulated steel and cement sectors, the highest bidder gets the mine and passes on the costs to consumers.
Q - HOW ARE THE RULES FOR THE POWER SECTOR DIFFERENT?
A - The process for the power sector is the reverse auction, where companies bid on the basis of how low their fuel cost will be in the electricity they will generate.
This is to ensure affordable power. In the past, owners of free mines could sell costly power in the spot market. After bidding on fuel costs, companies can also bid on the price of coal.
Q - HOW IS THE GOVERNMENT ENSURING STIFF COMPETITION?
A - The coal mine auction is a two-phased process. The government has offered 23 mines in the first round for which companies need to submit technical and price bids. After the price bids of technically qualified bidders are opened, the list is pruned to the top 50% highest bidders for the steel and cement sectors and the lowest 50% in the case of power plants. The lowest bid in the case of power plants and the highest quote for steel and cement companies becomes the applicable floor price, which is intimated to the qualified firms through e-mail about 36 hours ahead of the auction. The online auction starts on the scheduled day at a portal put in place by state-run MSTC, which displays the increased or decreased price of the blocks on offer. The auction is extended by eight minutes every time a company revises its bid and the process continues till there is no fresh bid for eight consecutive minutes. The bidders' identities are not revealed until bidding closes.
Q - WHY ARE COMPANIES BIDDING AGGRESSIVELY?
A - The first two blocks offered on Saturday received aggressive bids, with steel companies agreeing to pay nine times the floor price and power companies forgoing mining costs and willing to pay about four times the Rs 100 per tonne fixed charge. The Supreme Court's cancellation of 204 captive blocks has affected about Rs 4 lakh crore worth of steel, cement and power projects, which need fuel. The coal mines offer certainty in fuel supply and are cheaper than imported coal.
Q - WHAT HAS THE GOVERNMENT ACHIEVED SO FAR FROM THE AUCTION?
A - Coal-rich states will get revenue from the auctions. The government is looking to revise power tariffs lower, based on bids claiming zero mining costs. It is also getting a good price from steel and cement firms. Reliance Cement bid nine times the base price.
Q - CAN THE INITIAL RESULT OF THE E-AUCTION STRENGTHEN THE GOVERNMENT'S CASES IN COURT?
A - While industry experts had expressed concern over aggressive bidding leading to unsustainable electricity tariffs, the government said the success of the sale of the first two blocks only strengthens its position against the court cases.
Q - DOES THE AUCTION JUSTIFY THE CAG'S ESTIMATES ON THE COAL BLOCKS?
A - The CAG had estimated a loss of Rs 1.86 lakh crore to the exchequer due to the free coal mine allocations. The national auditor estimated average profitability at Rs 295 per tonne based on Coal India's prices and multiplied it by the 57 coal mines that were given for free to private companies. While the number of mines being sold by the government exceeds 57, most blocks are likely to fetch more than Rs 295 per tonne given the stranded end-use plants and the demand for coal.

 

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