Sahara says no benami money; SC talks of 'dubious' affair
Maruti's August retail sales up but good times unlikely to last

Corporate Sep 1, 2012

CAG was over-conservative in its Rs 1,86,000 cr loss number

By Vivek Kaul

The Congress party seems to be hell-bent on discrediting Vinod Rai, the Comptroller and Auditor General(CAG) of India, who has put the estimate of the losses on account of the coal blocks allocation scam (Coalgate) at Rs 1.86 lakh crore.

The latest Congress politician to join the "pull Rai down" bandwagon is Digvijaya Singh. Singh told The Indian Express that "the way the CAG is going, it is clear he (i.e. Vinod Rai) has political ambitions like TN Chaturvedi (a former CAG who later joined the BJP). He has been giving notional and fictional figures that have no relevance to facts. How has he computed these figures? He is talking through his hat." (Read here)

Let's try and understand why what Singh said is nonsense of the highest order and anyone who has read the CAG report wouldn't say anything that was as remarkably stupid as this. But before I do that, let me just summarise the Coalgate issue first.

Reuters.

Between 1993 and 2011, the government of India gave away 206 coal blocks for free to government and private sector companies. The idea being that Coal India Ltd wasn't producing enough coal to meet the growing energy needs of the nation. So free coal blocks were given away so that other companies could produce coal to meet their own coal needs.

Of these blocks given away for free, 165 blocks were given away free between 2004 and 2011. The Congress-led United Progressive Alliance (UPA) has been in power since May 2004. Hence, 80 percent of the coal blocks have been given away for free during the reign of the UPA government.

This explains to a large extent why Congress leaders are trying to discredit the CAG. Before Digvijaya Singh, Prime Minister Manmohan Singh broke his silence for once, and said that the CAG report could be questioned on a number of technical points. Finance Minister P Chidambaram said there had been no losses because of free coal block allocations and then denied making the statement a little later.

The CAG report on the explains in great detail the method they have used to arrive at a loss figure of Rs 1.86 lakh crore. Hence Singh's question "how has he computed these figures?" is sheer rhetoric and nothing else. Maybe he should just read the report again.

As is the case with any estimate, the CAG made a number of assumptions (for those who have a problem with this, even the government's annual budget is an estimate which is replaced by a revised estimate a year later, and the actual number two years later). The CAG started with the assumption that the coal mined out of the coal blocks has been given away for free. This coal could be sold at a certain price. Since the government gave away the blocks for free, it let go of that opportunity. And this loss to the nation, the CAG has tried to quantify in terms of rupees, in its report.

There were other assumptions that were made as well. Only the coal blocks given out to private companies were taken into account while calculating losses. Blocks given to government companies were ignored. Personally, I would have liked CAG to take the government companies into account as well while calculating the losses, because a loss is a loss at the end of the day.

Also, transactions happen between various sections of the government all the time and the money earned on account of these transactions is taken into account. So should the losses. Out of the 165 blocks allocated since 2004, 83, or around half, were allocated to government-owned companies.

The amount of coal in a block is referred to as the geological reserve. The portion that can be mined is referred to as the extractable reserve. The CAG calculated extractable reserves of the private coal blocks to be around 6,282.5 million tonnes. This is the amount of coal that could have been sold.

The second part of the calculation was arriving at a price at which this coal could have been sold. For this the CAG looked at the prices at which Coal India, which produces 80 percent of India's coal, sells its various grades of coal. Using these prices it arrived at an average price of Rs 1,028.42 per tonne of coal. Obviously there is a cost involved in producing this coal as well. The average cost of production came to Rs 583.01 per tonne. Other than this, a financing cost of Rs 150 per tonne was also taken into account.

This meant a profit of Rs 295.41 per tonne of coal (Rs 1,028.42 - Rs 583.01 - Rs 150). Hence the government had lost Rs 295.41 for every tonne of coal that it gave away for free. Hence, the losses were estimated to be at Rs 1,85,591.33 crore (Rs 295.41 x 6,282.5 million tonnes).

This brings me back to Digvijaya Singh. "He has been giving notional and fictional figures that have no relevance to facts," a part of his statement said. The numbers are not fictional at all. They are backed by hardcore data. If you don't use the numbers of Coal India, a company which produces 80 percent of the coal in India, whose numbers do you use? That is a question that Singh should answer.

Also, the price at which Coal India sells coal to companies it has an agreement with, is the lowest in the market. It is not linked to the international price of coal. The price of coal that is auctioned by Coal India is much higher than its normal price. As CAG points out in its report on an ultra mega power project, the average price of coal sold by Coal India through e-auctions in 2010-2011 was Rs 1,782 per tonne. The average price of imported coal in November 2009 was Rs 2,874 per tonne (calculated by the CAG based on NTPC data).

The CAG did not take into account these prices. It took into account the lowest price of Rs 1,028.42 per tonne, which was the average Coal India price.

Let's run some numbers to try and understand what kind of losses CAG could have come up with if it wanted to. At a price of Rs 1,782, the profit per tonne would have been Rs 1,050 (Rs 1,782-Rs 583.01- Rs 150). If this number had been used the losses would have amounted to Rs 6.6 lakh crore.

At a price of Rs 2,874 per tonne, the profit per tonne would have been Rs 2,142 (Rs 2,874 - Rs 583.01 - Rs 150). If this number had been used the losses would have been Rs 13.5 lakh crore. This number is a little more than the Rs 13.18 lakh crore expenditure that the government of India incurred in 2011-2012.

Even a weighted average price of these three prices would have implied a loss of Rs 7.3 lakh crore. And this when the coal blocks given to government companies haven't been taken into account at all.

For a local benchmark, the Madhya Pradesh State Mining Corporation actually auctioned coal blocks in the royalty range of Rs 700-2,100 per tonne - and this range too would have yielded much more than the Rs 1.86 lakh crore. (Read more here)

So the point is that the CAG, like a good accountant, has worked with very conservative estimates and come up with a loss of Rs 1.86 lakh crore. It could have easily come up with substantially bigger numbers, as I have explained.

Now coming to the final charge of Vinod Rai having political ambitions. "The way the CAG is going, it is clear he(i.e. Vinod Rai) has political ambitions like TN Chaturvedi (a former CAG who later joined the BJP)," said Singh. Well just because one former CAG joined politics does not mean that every other CAG will follow him.

Singh should well remember the old English adage: "One swallow does not a summer make".

Vivek Kaul is a writer and can be reached at vivek.kaul@gmail.com

Pages: 1 2

by Vivek Kaul

Related Stories.