Cabinet okays methodology for coal block auctions

The union cabinet on Tuesday approved a methodology for auctioning coal blocks to private companies, including upfront and production-linked payments and benchmarking of coal sale prices.

Coal blocks will be put for auction after the environment ministry reviews them, and bidders have to agree to a minimum work programme, according to an official statement. "The methodology provides for auctioning the fully explored coal blocks, and also provides for fast-tracking the auction by exploration of regionally explored blocks," it added.

According to reports, six explored blocks would be auctioned first, with estimated reserves of over 2,000 million tonnes.

Since 1993, coal blocks used to be allocated on recommendations of an empowered inter-ministerial panel.

However, the Comptroller and Auditor General of India (CAG) said last year that the process ''lacked transparency" and had caused a loss of Rs1.86 lakh crore to the exchequer.

According to the methodology approved on Tuesday, auctioning would take place for fully explored coal blocks as well as regionally explored blocks after ascertaining the geological data.

The Cabinet Committee on Economic Affairs (CCEA) approved the production-linked payment on rupee per tonne basis, plus a basic upfront payment of 10 per cent of the intrinsic value of the coal block. The intrinsic value of coal block will be calculated on the basis of net present value of the block arrived through the discounted cash flow (DCF) method.

The DCF method relates the value of an asset to the present value of expected future cash flows of the asset. It is based on the principle that for any initial investment an investor will assess future cash flows from that entity to provide a minimum return.

To help benchmark the selling price of coal, the international freight-on-board price from the public indices like Argus/Platts will be used to calculate the mine mouth price. As a buffer against short-term volatility, the average sale price will be calculated by taking prices of the last five years.

For the power sector, the CCEA directed providing 90 per cent discount on the intrinsic value for tariff-based bidding, which will help in rationalising the electricity tariff.

To ensure early operationalisation of blocks, there would be an agreement between the coal ministry and the bidder to perform an agreed minimum work programmes at all stages.

There would be development stage obligations in terms of milestones to be achieved such as getting mining lease, obtaining environment or forest clearances, etc. The bidder will have to give performance guarantee during the developmental stage.

The successful bidder will get two years for exploration and five years for block development.

The new auction blueprint allows relinquishment of a block without penalty, provided the bidder has carried out minimum work programme. The environment ministry will review the details of the coal blocks before they are up for auction.

However, final approval will be subject to the statutory clearances under the law.