India may have to pay a heavy price for unprecedented corruption in power and coal

Pratim Ranjan Bose

The story goes back to end of the last decade.

A large Indian state went on a spree to sign preliminary power purchase agreements (memorandum of understandings) to buy electricity from nearly 7000 mw of proposed coal-based thermal capacities, in the private sector.

It is told, the ruling politics collected over ` 1500 crore in kickbacks, paid at the rate of ` 25,00,000 for every mega watt, for forcing the State’s loss-making electricity distribution utilities to enter such deals.

In return, the generation capacities were at liberty to pad up the energy bill, to be paid by the Discom, and earn super-normal profit.

The ultimate burden was to be borne by the nationalised banks, as utilities would divert project finance in mitigating revenue gap, so as to spare the final consumer from hike in power tariff and protect the image of the Government.

The design is not new. In fact, the country’s banking sector has already piled up over ` 2,00,000 crore (approximately $32 billion at current exchange of `62 a dollar) risky assets in the electricity distribution sector due to such gross misuse of bank finance.

But, this time, the banks were saved.

Nearly 4500 mw of such projects, which are in various stages of implementation, are now stranded for want of coal. The investors were so confident to take the system for a ride that they had set up power plants without any fuel supply arrangement in place!

Having received assurance from the state utilities to buy electricity; investment in electricity generation facility, they thought, would buy them great bargaining power that no government in the Centre or State could afford to ignore. Coal was considered an insignificant link in this puzzle.

The expectation was not juvenile. For years, investors in power sector enjoyed unparallel political clout. A classic example of this era is Dhabol Power Company –now renamed as Ratnagiri Power – set up by Enron at the compromise of national interests.

But the calculations went wrong this time. A wider and systemic abuse of ethical standards has finally taken its toll on the entire energy sector. An unprecedented fuel crisis threw the entire investment plan in Indian power sector out of gear.

And in this monumental mess - that led to creation of tens of thousands of mega watts of idle generating assets - not many are ready to take note of the ‘plight’ of those 4500 mw capacities.

They are here to suffer, perhaps a little more than the rest.

The mess created

Looking back, corruption has started setting its roots deeper in the Indian energy space since economic liberalisation in 1991.

The controversial farm-in offers to private capital in the country’s proven oil and gas reserves; fast-track approval to 16 dubious power projects (including Dhabol) between 1991 and 1996; the policy to strip Coal India Ltd from its assets (1997) and distributing the same to captive miners thereby by-passing the Coal Mines Nationalisation Act and; last but not the least the (fixed) tariff bidding principles for power projects beginning 2006 followed by post-facto change in tender norms are all glaring examples of compromise of ethical standards in the energy sector.

But, what happened in coal sector between 2005 and 2009, in the name of ‘energy security’ was unparallel and will leave a lasting effect on the economy.

On the one hand, Coal India was stripped of nearly 40 per cent of its reserves for redistribution to over 300 captive miners. How such coal blocks were allocated and what happened next, is best described as “Coalgate” – the biggest financial scandal India has ever come across.

What went under-reported is anequally or more scandalous move to issue fuel linkages to 1,08,000 MW proposed capacitiesslated for completion between 2009 and 2017. This was more than double thetotal coal-fired projects in operation in India till 2009.

The linkages were due to be converted by CIL into firm pacts, for supply of coal at less than half the global price.

The coal miner was mandated to step up its supplies to power stations by nearly 2.5 times in a flat eight years between April 2009 and March 2017! Even a novice in India’s trouble-torn mining sector will tell you that no miner in the country, in public or private sector, expects to grow at this pace that too on a high base.

The government was fully aware about the impracticability of issuing so many linkages. Beginning 2006, CIL was consistent in warning the standing linkage committee (SLC), chaired by the coal secretary, about a looming supply shortfall.

But the linkage committee was unfazed. It is still a mystery why they prefered to do so. In the absence of any formal probe, and considering the precedence of “pulls and pressures” behind the coal block allotment scam; one may only end up smelling a rat.

Indeed, in every similarity to coal block allotment scandal, companies – including a large number of operators with dubious background of making mouth-fresheners or developing real estate – queued up before the SLC armed with a paper proposal for investment in power generation and, strong recommendations from the ruling State politics.

Little doubt many of such applicants were genuine investors. But many more may have managed to get through by greasing palms

They were hoping to make a wind-fall gain by selling project proposals, complete with a fuel linkage, to more genuine investors at a premium. The buyers of such proposals were expected to pad up the ‘corruption cost’ in the project cost.

In the end some made money, exactly as it happened in Coalgate. But, the industry, as a whole, landed up in trouble.

Of the 1,08,000 mw proposed projects only 40,000 mw are implemented so far. But that was enough to trigger a fuel shortage.

Most of the new capacities in private sector are facing serious viability concerns in the face of inadequate supply of cheap domestic coal and serious disinterest among final consumers to buy costlier electricity, generated out of imported coal.

The problem will aggravate to unforeseen levels once another 38,000 mw capacities are implemented in next two years. Rest assured they will join the long list of stranded capacities or incomplete power projects in the country, giving rise to an another `2,00,000 crore ($ 32 billion) sticky assets to the banking sector.

India may have to pay a heavy price for indulging in unprecedented corruption.

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Picture courtesy: photofree.com; buildpedia.com; wikimedia; clker.com and fineartamerica.com 

The dangerous precedence of high dividend payout by Coal India Ltd and the road ahead

Pratim Ranjan Bose

Money is the source of all evils!

India’s cash rich State-owned oil companies learnt it many years ago. Now it’s the turn of Coal India to face the truth.

On January 14, the company declared a record 290 per cent interim dividend aggregating nearly Rs 18317 crore, approximately $3 billion at current exchange, as special (interim) dividend for 2013-14. The total outgo is more than double the dividend payout for 2012-13.

The move was aimed to help its promoter, India Government, to tide over the fiscal gap. As a 90 per cent owner of the company, the government will get nearly Rs 16485 crore as dividend, up by approximately Rs 8500 crore compared to last year.

Government earlier planned to mop up the sum, which is nearly one-fourth of the budgetary gap, through a 5 per cent disinvestment programme. But the plan was cancelled in early December due to strong objection from labour unions.

The ruling Congress-led UPA did not want to ruffle feathers of vast pool of coal employees ahead of the General election in April-May 2014. CIL was asked to compensate the loss.

Cash cow

This is not the first time CIL is used by the government as a cash cow.

Ever since the company turned around in the end-1990’s, it has been a heavy contributor to the government coffers either by way of taxes, that kept on rising with increasing production, as well as dividend.

From a mere 289 million tonne in 2002-03, CIL’s sales volume has increased by 61 per cent to 465 mt in 2012-13. The 1.6 times growth in sales had a direct impact on tax revenues. And, last year the nation collected a staggering Rs 36,000 crore or $5.8 billion in taxes from the coal company. The money was divided between the India government and the coal producing states.

But, what has grown faster is the dividend pay out.

Dividend History of CIL

Year	Dividend paid (in crore)	Government’s share of dividend	Rate of Dividend (%)
2005-06	1263	1263	20
2006-07	1500	1500	23.748
2007-08	1705	1705	27
2008-09	1705	1705	27
2009-10	2210	2210	35
2010-11	2463	2217	39
2011-12	6316	5685	100
2012-13	8843	7959	140
2013-14	18317	16485	290 (Interim)

Despite selling coal dirt cheap, when compared to global prices, the increasing volumes and better housekeeping (compared to its earlier avatar, when CIL was used as a vehicle to fulfill the socialistic goals of the closed economic era that ended in 1991), saw CIL’s cash boxes ringing.

The results are evident in the company’s cash reserves. The same company that approached the World Bank in 1997 for a $ 1 billion line of credit to finance its five year capital expenditure, today has a cash reserve of Rs 62,000 crore or $ 10 billion, which is a shed lower than its turnover of Rs 68,000 crore ($11 billion) and nearly two-and-a-half times the estimated capital outlay for the Plan period (2012-17). The company earned a profit of Rs 17356 crore in (2.8 billion) in 2012-13.

The indications are clear. CIL is earning more than it could spend  and is accumulating an ever increasing cash reserve.

Government steals opportunity

That doesn’t mean it was any less eager to spend. During last seven-eight years CIL was genuinely aspiring for hitting a higher growth trajectory. A huge plan was rolled out to expand production capacities at home and acquire mining assets abroad.

While the overseas acquisition initiative gave way to cumbersome, yet binding, government regulations applicable to State-owned companies; the domestic production growth was slower than estimated due to increasing structural hurdles (land acquisition, rehabilitation and resettlement and, environment and forest clearances) on Indian mining industry.

The result is: CIL’s production grew by a mere 14.5 per cent between 2007 and 2012 as against the projected 36 per cent. Which means the company went on piling up cash.

There was no way this cash be invested in taking equity exposures in other businesses. There are restrictions even in entering any new business in the same energy vertical (like electricity generation). Government was not interested either in removing the structural hurdles, that restricts the growth of domestic coal output. It was interested in cash.

With equity capital remaining same, CIL’s dividend payout doubled between 2005 and 2010. But, the pay out started picking up at faster paces from 2011 (100 per cent).

The rest is history.

A dangerous precedence

By every means, CIL had little reason to fork out such high dividend (290 per cent) in this fiscal.  

After years, the company reported a decline (10 per cent) in net profit in the first half of 2013-14, courtesy the government policies that forced it escalate supplies to power sector at less than average price (which itself is half the global coal prices) and, lower returns from e-auction (due to a softening of global prices).

In 2012, Coal India was forced to commit supplies to nearly 78,000 mw new power generation capacities that will come on stream in phases. Of the total nearly 40,000 mw capacity is already in place. The rest are scheduled for commissioning before April 1, 2017.

CIL does not have as much coal to fulfill this commitment. And, if all the power projects come up in time, the miner will end up paying heavy penalties.

Clearly, there are serious concerns over the company’s earnings outlook. And, under normal circumstances, it shouldn’t have paid such a high dividend at this juncture.

But, the government insisted that it needs its share of the unutilised cash. And, that may just be the beginning of the problem.

If the opinion polls are correct, India is going to have another coalition government at the Centre in 2014. And, chances are high that it would be a weaker government (than UPA-II), with smaller regional parties or the new-born anti-corruption Aam Aadmi Party, playing king makers.

The history says, such governments are unlikely to take the disinvestment agenda ahead and will be more dependent on other methods to fill coffers.

To their satisfaction, the UPA-II left a dangerous precedence of extorting Coal India. India’s national miner may now be forced to fork out as large sums as dividend.

It’s a different matter that any such tactics, if pursued, may threaten the very existence of the National miner in the longer term.

But, then the Indian politics have hardly cared for well being of State-owned companies in last two decades. So, they may end up killing the goose that lays golden eggs.

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Picture Courtesy: Business Line and Finolexblog.com 

West Bengal: Socialism, illegalities and inequality

Pratim Ranjan Bose

Inequality is increasing across the world. This is one flip side of the investment bank-led capitalist growth pursued after the fall of Berlin Wall.

India is no exception to this rule. But, why should a State like West Bengal that is always dominated by Leftist or socialist politics - both in terms of electoral fortunes and policy implementation - be one of the most in-equal societies in the country?

On January 6, an Indian pink daily carried a report on growing rich-poor gap in urban India. The gap, measured by Gini coefficient, has grown most prominently in as many as 10 states including, Assam, Haryana, Karnataka, Kerala, Maharashtra, Odisha, Rajasthan, Uttar Pradesh and West Bengal and Delhi.

And four of them - Karnataka(0.41), Kerala (0.39), Haryana (0.38) and West Bengal(0.38) – report higher inequality than the national average of 0.37 in urban areas.

A Gini coefficient is measured against a scale of 0 and 1. Higher the coefficient, wider is the rich-poor gap. Higher inequality does not necessarily mean that the poor is getting poorer in absolute terms.

Shop till you drop

It may quite be the case that the average earning of the bottom 20 per cent is moving up. But, the rich 20 per cent is definitely getting richer at a faster pace. In all probability that is exactly the case with top four in the list, at least two of which - West Bengal and Kerala - are ruled by Leftist ideals.

Leaving theories aside, one can easily identify some of the reasons behind the widening rich poor gap in at least three of the states.

Kerala is clearly fueled by the gulf money. Haryana and Karnataka have stinking-rich landed gentry who are getting richer in a liberalised economy. Both are dominated by a wide cross section of India’s rich and corrupt politicians and are front runners in industrial growth.

Idiosyncratic features of Bengal

But, West Bengal has none of these common features.

It doesn't have access to dollars, as in Kerala.

Leave alone private jets, palatial bungalows and fleet of imported cars (owned by many top politicians across the country); senior leadership in West Bengal cutting across party lines are better known for their simple living and high socialistic ideals.

It is perhaps the only state to have implemented land reforms policies of the country to its maximum potential by way of enforcing land ceiling, redistributing excess land to rural poor, offering landless farmers legal protection against eviction and the right to earn livelihood, ensuring minimum wage for farm labour and; decentralising administrative power to elected local bodies.

The entire process was in place at least 30 years ago, making the State a model for empowerment of the poor and, theoretically, bringing an end to capital accumulation by a few.

If capital formation was curbed in villages, there were little chance for capitalists to make hay in the cities either.

Esplanade

Leftist political ideals have always had strong influence in West Bengal’s electoral scene. Left Front ruled the state for a record 34 years from 1977 to 2011. They were overthrown by a party, Trinamool Congress, which is more Left than Left Front, in terms of its election manifesto and policy implementation.

The result of this political trend is evident in West Bengal’s subdued business scenario. Once the industrial capital of the country; Bengal has turned a graveyard of industries at least 30 years ago.

And, whatever little momentum was generated by the former Buddhadeb Bhattacharjee government, to rejuvenate the scene, ended in a whimper; as the state was gripped by another spate of suicidal politics, spearheaded by Mamata Banerjee’s Trinamool Congress.

Cash economy, and high real estate rates

But nothing seems to have worked in favour of the state when it comes to bridging the rich-poor gap that has now reached dangerous proportion.

In a State, where Chief Minister shun official residence for a Jhuggi; an increasing number of people are definitely making money, black money, through illegal means.

The evidence is readily available in the Kolkata’s real estate rates. On carpet-area basis, Kolkata’s residential property value is comparable to economically more bullish Chennai, Bangalore and Noida in the National Capital Region (NCR)!

Booming real estate

Chennai is India’s auto-hub, Bangalore is home of top IT and biotechnology companies and Noida is one of the top commercial centres of this country. In comparison Kolkata is a poor cousin. It is low on economic activity as is evident in its electricity consumption, tax collection and so on.

Lack of job opportunities made the State a net exporter of both cheap labour and skilled manpower to the rest of the country. If Bengali farm labours are travelling to Kerala or Punjab for livelihood opportunities; Kolkata’s best students migrate to other cities for jobs.

The contradiction doesn’t end here. During the last four years, property prices were down in all major cities due to lack of demand. The only exception is Kolkata. Here prices moved up on a year-on-year basis, indicating far stronger demand-pull than the rest of the country.

But who buys these high priced properties? Definitely they are not the tax payers. Check with the banks, there is hardly any growth in number of loan accounts. Properties worth crores of rupees are sold here, on cash!

They are not investing either for housing or for tax avoidance. They are flooded with cash and parking the same in properties. At least 40 per cent of residential properties in any housing estate are either vacant or on rental. And, since there is an over supply of properties, rentals are subdued. That makes the case even more difficult for a tax payer to invest in real estate on loan and grow his wealth. Because his EMIs are a few times of the rentals earned.

The situation is same across the urban areas of West Bengal. Travel along the length and breadth of this highly urbanised State, and you will find apparently sleepy towns or non-descript urban areas commanding as high property prices as in industrial centres of Pune or Hyderabad.

There is something really distinct behind this inexplicable prosperity of a section of population in West Bengal.

Managing illegalities?

I have not come across any study on the rising inequality in West Bengal. I can only hazard a guess.

Debabrata Dutta in an article in Economic and Political Weekly (EPW), blamed the former Left Front government for introducing an informal system of governance that allowed many to operate out of the loop of the formal economy. The phenomenon, termed as “managing illegalities”, is considered instrumental behind the State’s abnormally low revenue collection ratio vis-à-vis Gross State Domestic Porduct.

It was initiated in the garb of helping the poor. So, auto-rickshaws were allowed to ply illegally. Hawkers occupied the pavements, blocking way of costly showrooms or super luxury hotels. Illegal squatters set up shops or houses on prime properties.

Sooner or later, it became the mainstay of the economy. The party leadership down the line had become the epicentre of all illegal power giving rise to a hierarchy of nouveau riche, thriving on the business of managing illegality.

The protected Eastern Kolkata wetlands were converted into prime real estate. The city’s wide pavements, once encroached by the poor, became lucrative commercial spaces changing hands for lakhs of rupees. From health, housing to transport, strong cartels were at play everywhere.

On Migration?

Some people were getting richer quickly and the poor had the option open to either work for the cartel or move away. Most of the poor opted to serve the cartel, further helping the managers of illegalities to strengthen control of politics.

Villages witnessed a spree of consolidation of the same farmland - that was once redistributed - by virtue of lease agreements. There emerged a new set of cash rich landed gentry. They are more powerful than the erstwhile landlords or Zaminders and operate completely out of the ambit of law.

Between 2001- and 2011 West Bengal witnessed a three-fold growth in census towns and a higher than average population growth in cities. The indication is, more and more rural poor are shunning agriculture and migrating to urban areas.

One may argue if the new wave of capital accumulation in villages is triggering rural-urban migration leading to rapid urbanisation and widening of the rich-poor gap in cities.

In 2006, when Mamata Banerjee was protesting acquisition of 1000 acre farm land for Tata Nano at Singur; large tracts of land in the region were quickly changing hands. 'Nano' left Bengal in 2008 but, Singur, once a nondescript village, witnessed a marked rise in real estate construction in last five years.

To cut a long story short, behind the humble lifestyle of the top Left leadership, there emerged a vicious system that shook the very foundations of equality, once pursued and implemented by the same politics.

Bengal thrives on illegalities!

Left Front is out of power but, it is doubtful if there is any abetting of the growth of informal economy. On the contrary it might have become a bit too big for the comfort of formal economic activities.

The evidence was readily available in the recent growth of ponzi schemes in West Bengal. The operators not merely mopped up lakhs of crores from unsuspecting investors but, used the funds in owning vast tracts of land across the State through fictitious ventures. They are today the biggest financier to the State politics and, directly or indirectly, control majority of the media houses.

Bengal thrives on management of illegalities!

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Picture courtesy: India Poperty, India Today, Rediff, Business Line