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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