Ministry takes auction route for coal allocation

Written by fe Bureau | New Delhi | Updated: Feb 27 2014, 10:49am hrs
The coal ministry on Wednesday switched to the auction route for the allocation of coal mines, ending a long-standing regime of nominations.

The ministry has invited bids for the allocation of three explored blocks Jhirki & Jhirki (West) of East Bokaro coalfield, Andal Babuisol of Raniganj coalfield and Tokisud-II of South Karanpura coalfields.

These blocks are estimated to have combined reserves of 500 million tonnes. Only end-user industries in steel (blast furnace), sponge iron and cement can participate in the bidding.The policy for auction of captive coal blocks to private players for end use was approved by the Cabinet Committee on Economic Affairs (CCEA) in September. But since the Centre has decided to put up for auction only fully explored coal blocks where there is a clarity on coal reserves to avoid any controversy about valuation of blocks later, the ministry has taken so long to start the bidding process.

The ministry may invite more bids in coming months when more blocks are available.

The move comes one and half a years after the government auditor slammed the Centre for extending undue gains of Rs 1.85 lakh crore to private companies by allocating captive coal blocks to them on the nomination basis.

Auction is already the norm in the allocation of telecom spectrum.Under the policy approved by the CCEA, the successful bidder will be selected on the basis of Rs/tonne bid. Under this model, developer quotes a certain fixed Rs/tonne number for coal produced from the block during its entire lifecycle to be given to the government annually.

Escalation is linked to wholesale price index which monitors inflation.The policy has favoured a production-linked payment model over upfront lumpsum bidding to reduce financial burden on companies.Besides, developers would also be asked to pay 10% of the intrinsic value of the coal block upfront to ensure the winning bidder remains committed to the project.

The intrinsic value of coal block will be calculated on the basis of Net Present Value (NPV) of the block arrived at through Discounted Cash Flow (DCF) method.

The policy has given relief to the regulated power sector as companies building projects on the basis of tariff-based bidding would get 90% discount on the intrinsic value of coal block that would be used for captive purpose.

The policy also lays down specific minimum work programmes at all stages of development of a coal block to ensure firm commitment from the winning bidder.

The bidder will also have to give performance guarantee during the developmental stage.

The successful bidder will get 2 years for exploration (for regionally upgraded blocks) and 5 years for development of coal blocks. The new policy also provides for relinquishment of the block without penalty provided the bidder has carried out minimum work programme stipulated in the agreement. MoEF will review the details of the coal blocks and communicate its findings before the blocks are put to auction. However, final approval will be subject to the statutory clearances under the law.