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Coal ministry plays safe on auction of captive blocks

Reluctant to be drawn into any new controversy on coal block allocations, the coal ministry has left it to the Cabinet to finalise the formula for the auction of 22 coal blocks with 2.7 billion tonne of reserves that would be offered to cement, power and steel companies for captive use.

Reluctant to be drawn into any new controversy on coal block allocations, the coal ministry has left it to the Cabinet to finalise the formula for the auction of 22 coal blocks with 2.7 billion tonne of reserves that would be offered to cement, power and steel companies for captive use.

About 20,000-MW of new capacity is proposed to be announced later this year and a decision on initiating coal block auction is considered important for new projects of several private sector companies, including Jindal Power, JSW Energy, Sterlite, Adani Power, GMR and GVK.

The Centre amended the Mines and Minerals (Development and Regulation) Act 1957 to propose coal block allocation through an auction process for all new projects in 2010 and later its notified rules. But the formula (determining the reserve price/ floor price and method of bidding) for awarding coal blocks under auction process is yet to be finalised and the coal ministry has approached the cabinet committee on economic affairs to approve the same.

Sources said in the note for the Cabinet, the coal ministry has favoured a production-linked payment model over upfront lump sum bidding for acquiring captive coal blocks, but has offered different models to implement it and left it for the Cabinet to decide the best course of action. ?The CAG reprimand of coal ministry is still weighing heavily on coal ministry that does not want to be seen as the only one pushing for a particular formula on coal block allocation,? said a source.

?We hope the ministry?s overcautious approach does not make the auction process cumbersome for us,? said a private sector power producer. He said private sector projects that accounted for close to 40% of power capacity addition in 11th Plan would rise to over 50% if a transparent mechanism for allocation of fuel resources is adopted.

In the note, the coal ministry has said the production-linked payment option be approved with developers being asked to pay 10% of the intrinsic value of the coal block upfront to ensure that winning bidder remains committed to the project.

But the ministry has remained non-committal on specifying criteria for selection of bidder under this model suggesting that it could be a choice between profit share where bidder is required to quote a percentage of its profit as a bid parameter or revenue share model where a certain percentage of revenue is agreed to be paid to the government.

While profit share delays government’s earning as the company will recover costs first before declaring profit and sharing, the revenue share allows government to be paid a percentage of revenue before recovering costs. The coal ministry has said in revenue sharing model also, the choice could be between sharing a percentage of notional revenue in rupee or sharing a percentage of coal production.

The ministry has also given the option of R/tonne bid model where developer quotes a certain fixed R/tonne number for coal produced from the block during its entire life cycle to be given to the government annually linking any escalation to inflation index like WPI. ?We want R/tonne model to be adopted as it does not require setting notional price of coal and is similar to risks in terms of revenue share approach,? a coal ministry official said.

The other option given by the ministry is to go for the reserve multiple method where amount to be paid by the bidder is based on total extract-able reserves. The amount payable gets determined when mine plan is prepared and reserves are determined.

The ministry has also suggested determining floor price of coal blocks for auction of blocks to government companies and tariff-based power projects that will get coal block on payment of money above the determined reserve price. The ministry suggested bidders may be asked to furnish a performance guarantee during the exploration stage of an amount equal to estimated exploration expense for the block.

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First published on: 20-08-2013 at 03:49 IST
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