Coalgate- Part 2: Analysis and CAG of India

The previous post talked about the actual facts behind what has become infamous as the Coalgate scam. It is similar to the 2G spectrum as a natural resource was handed out cheaply to private entities who made profits selling it and did not, as the government claims, result in lower price to the consumer and went against governments own declared intentions and goals and there were favours given to a chosen few. The difference lie only in the specifics of how it happened.

The similarity continues in the government claiming Zero loss and blasting the CAG for sensationalising the entire issue. I just do not get it. Don't these people have even common sense required of politicians? The CAG did not announce these in a press conference! He submitted his report, which is his constitutional duty, to the President. Our previous President kept it with her till the last day in office and then placed it before Parliament. Due process was followed and nothing was out of the line and irresponsible comments against a constitutional authority is irresponsible and childish.

There were also claims that the CAG figures are wrong and exaggerated. Let us assume that the CAG figures are wrong to the tune of 99%. So, there was a loss of only 1,860 crore. Cheap money?? It is our money and the government is responsible to us and must explain why it threw away this much money! Another fact is, the CAG has not said that this is the exact loss to the exchequer, this is based on calculations merely to give a sense of the magnitude of the issue and can be off by some margin. Rather than giving a lot of explanations on possibilities, it is the responsibility of the CAG to bring more clarity into the picture and say what is the potential loss and the CAG must be lauded for this work.

Next comes the issue of whether CAG crossed his constitutional mandate. The CAG was called the most important constitutional authority by Dr.Ambedkar and that too for a reason. This is the only institution that scrutinises the governments work, generates over 70,000 audit reports along with Principal Accountant Generals in the states, detects procedural and financial irregularities and in case when financial irregularity is high, detect administrative irregularity as well. It is being alleged that CAG cannot delve into policy matters and he can only audit the accounts. If the CAG is only an auditor who has to ensure the balance sheets match, then he does not have to take an oath to uphold the Constitution and law whereas ministers take an  oath to bear faith and allegiance to the Constitution and work in accordance with the Constitution. The CAG is an independent Constitutional authority and can be impeached only in the manner of a Judge of the Supreme Court. It is highly unlikely that a mere accountant or auditor would require such freedom and high constitutional status.

What separates the CAG from normal auditors is not mere accounting but its audit of propriety and audit of efficiency, economy and effectiveness. This is not mentioned in the constitution but this is the worldwide practice of Supreme Audit Institutions and also the legacy of colonial rule. The CAG can ensure whether the expenditure was necessary, whether it attained its goals and whether it did so at lowest expense. Its reports can also go into whether the governmental action is improper even if it is legal (like arbitrary allocation of coal blocks). Thus, it can go into whether a decision was correct and this has been the accepted practice so far.
(Arora and Goyal, Indian Public Administration Institutions and Issues, Part8,The Accountability System,"Comptroller and Auditor General of India"
http://www.thehindu.com/opinion/lead/article2568360.ece
http://www.thehindu.com/opinion/lead/article2568360.ece )

A popular misconception is that CAG has fixed government's corruption and indicted individuals in the case. CAG reports are meant as a tool of self-correction in departments and to rectify these errors. The hearings of Public Accounts Committee, which uses the CAG report and is assisted by the CAG, are not meant to act as hearings on disciplinary actions or court hearings but meant to fix the system and correct flaws. Therefore, a personal attack on the CAG is uncalled for and if it does happen, it is just like what we all would do when someone points out our mistakes- we go on the defensive and the best defense is to attack the individual.

If the government intended to rectify the errors, it would have recognised the report and accepted that there were errors in the system and we would rectify it. But this can happen only if these were errors in policy and system because accepting these errors would also mean admitting that individuals are responsible for these errors. Therefore, the only viable defense for the guilty is accuse and attack.

These are the facts and these are the issues. I leave it to you to judge. I hope it does more than become a brand building exercise for P&G.

full disclosure- I have been preparing for civil service exams and most of what I have written about CAG come from the books and newspaper articles I have read and from my father who works in the Indian Audit and Accounts Department headed by the CAG

Coalgate- Part-1: The Basic Facts

What is important- All the people in the country or the country's perception in the eyes of a few who will decide and certify the government as investor friendly, pro-active and supportive of development? What is the function of government- to protect the interests of the people or the interests of those who intend to destroy the environment for their private profit? What is development- a growth that delivers riches to the riches and misery to the poorest?

Let us not judge them without facts. So these are the facts-
The reason for allotting coal blocks to private companies was to boost coal production as Coal India Limited was unable to meet the huge demand in the country. Rather than allowing companies to become miners, the government decided to allot captive coal blocks, i.e, it allowed companies own and operate mines to meet their need for coal, the main industries being power and cement manufacturing. It is a wise decision since our power plants are working at low plant load factors due to unavailability of fuels. The government's decision not to auction coal blocks was to ensure low price for electricity.

So how did it determine who would get these coal blocks? A logical way would be to judge them on their ability to develop mining projects (since coal mining was nationalised, there is no point in considering coal mining experience or expertise), grant them without bias, take them back if fields are not utilised by the allottee and impose conditions on the price at which the output from coal is sold (electricity or cement) since they are getting the resource for free, make these conditions clear and keep them unchanged.

What actually happened was this- there was no logical way of choosing who should get these coal blocks. It was allotted in a completely opaque manner by a screening committee which has not made public the criteria it used to allot coal blocks. Therefore, the coal block allocation was arbitrary and opaque. Something that cannot be allowed in a democracy. The Government's defence- it used a screening committee and it was done by the state government. But how the screening committee decided who should be given coal blocks is also not clear.
http://www.frontlineonnet.com/stories/20120921291803600.htm

Reliance power was allotted a captive coal block for its Sasan Ultra Mega Power Plant(UMPP), which means the coal from the Moher and Moher-Amlohri extension and Chhatrasal blocks should be used for generating power at Sasan and this was the condition on which all companies submitted applications for coal block allotment. After the block was allotted, government allowed Reliance power to divert the coal from this block to another of its power plant. This has 2 major issues-

1)This power plant supplied power to highest bidder and so the defence of low electricity price goes out the window. This means that Reliance made money out of it, whereas the government loses revenue.
2)Permission to divert coal to other locations was granted after it was allotted and so it is an undue benefit granted to Reliance since there would have been more applicants and others suitable to get the block had they known that such an option existed
http://www.thehindu.com/news/national/article3784810.ece

Coal is a major mineral and central government has jurisdiction to decide policy on this matter. It had recommended auctioning as the route to allocating coal blocks as it was aware of windfall gains to private parties. Inspite of this, auctioning was not done and the government hides behind the "state government compulsion", perhaps a welcome change from "coal"ition compulsion.
 http://www.thehindu.com/news/national/article3251983.ece

Since the reason for granting coal blocks without bidding was to ensure low electricity prices, there should have been the condition that those running power plants with coal from captive fields sell power at low rates. The government seems to have realised only now that such a step was necessary, in spite of it being so obvious. It is only going to regulate the price at which electricity is supplied by these companies.

http://economictimes.indiatimes.com/news/news-by-industry/energy/power/power-tariff-charged-by-captive-coal-block-owners-to-be-regulated/articleshow/16360164.cms

http://articles.economictimes.indiatimes.com/2012-09-09/news/33713621_1_coal-blocks-power-projects-jindal-power

The government has itself admitted that 57 blocks were allotted and only one has been developed so far and this means zero loss to the government.If the purpose was to meet the demand of industries, then not meeting this demand is a mistake and maladministration in itself. By not mining the coal, there is low capacity utilisation in power plants(remember the largest black-out in the world?) and thus loss of money to everyone!
http://www.thehindu.com/news/national/article3815701.ece?homepage=true

I am yet to find out whether those who were granted coal blocks to manufacture cement made cement at lower prices. Since only 1mine has been developed, perhaps this has not happened. If this happens, there are issues galore.
1)If they sell cement at market prices, they are getting huge profit since others have to pay market price for coal and they get it almost for free
2)If they sell cement at lower prices, they have an unfair advantage of cheap raw material.

These are the issues CAG has brought out in its report about what is now the infamous Coalgate scam