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Spectrum to Coal Scams

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Compares and contrasts the spectrum and coal scams and raises important questions of public governance and accountability

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Spectrum to Coal Scams

  1. 1. From Spectragate to Coalgate: Private Gain or Public Good-I? Barun Kumar Basu Events of the last 18 months or so in India– spectrum, iron ore, airports, sand and nowcoal mining gives an impression that, in Leo Tolstoy’s words, “The time is fast approachingwhen to call a man a patriot will be the deepest insult you can offer him. Patriotism nowmeans advocating plunder in the interest of the privileged classes of the particular Statesystem into which we have happened to be born.” A common thread that runs through allthese is their Hunnish plunder by privileged classes. I confine myself only to spectrum andcoal for reason of brevity and space. In 2G there was a greenfield commodity – spectrum - available for sale whose marketdemand was unknown. At the same time, state policy targeted provision of cheap mobilephones that my attendant and driver could easily afford. In order to put a cheap price on agreenfield commodity whose market price and availability of technology were unknown, theState decided to invite bids on a first come first serve basis. Those who applied for spectrumlicenses were all new operators then, whose ability to deliver mobile technology at an affordable price was unknown even to the seller. The State therefore assumed a risk that ultimatelypaid off as a rapidly widening market grabbed the new technology. The issue of revenuemaximization was incidental, while the State provided an unwritten subsidy, both of risk andcost. At heart was the public good that has been amply met, irrespective of UPA or NDA. However, within the good lay the bad. Criminal breach of trust in informing biddersbeforehand of costs that would safely pass muster in violation of secrecy vitiated the system.What followed was even worse that severely dented India’s international credibility. Publicinstitutions, constitutional, investigative and taxmen, jumped into the fray and prominentlyfeatured on media screens bandying their reports in an evident sign of victory over avanquished State, assigning fantasmorgic Rupee values even as they sought to book culpritsand recover ill-gotten assets and lost taxes across international borders. The courts too joinedin and 122 new licenses were cancelled in favor of an auction, the contours of which remainas blurred as ever. That auction can be customized and there is no one size fits all solution, as for metalscrap disposal, was given the go-bye. All these events had the intended effect of driving outcompetition from new global telecom majors. Public institutions therefore played into thehands of an emerging cartel of 4-5 private operators that could not be matched in theirfinancial muscle by nearly bankrupt State-owned BSNL and MTNL that already sufferdwindling land line penetration. One can only hope that the sequence of all such actions wasonly a coincidence. In a dramatic turnaround, a beleaguered State decided to go in for a sophisticated e-auction of 3G spectrum and netted promise of approx. Rs. 70000 crore in spectrum licensingfees. However, owing to high entry costs, 3G never became affordable and wary companiesdid not invest much in strengthening and expanding their networks. In investigating andreporting upon the 2G ‘scam’, the media and public institutions presumed that if 3G nettedRs. 70000 crore, 2G being a service with a larger clientele, ought to have netted at least anarbitrary one and a half times more. What was conveniently forgotten was the fact that a 3Gservice had to piggyback upon the 2G service, already adding to costs and proportionatereduction in popularity. Following judicial annulment of new 2G licenses, the State waspushed into re-auctioning of 2G airwaves.
  2. 2. All this was unmindful of a rapidly emerging cartel stated above that could easilydictate a price to the State, irrespective of TRAI’s manifold high pricing that too was a falloutof the ongoing witch hunt and the corresponding human tendency to ‘play safe’ oblivious ofpublic good. Higher entry costs invariably implied higher costs for users in line with expectedbusiness wisdom, notwithstanding TRAI’s claims that such rise would only be nominal. Thisis when neither has TRAI succeeded in ensuring high quality of 2G mobile services nor anydecline in call charges in spite of a 500-million subscriber base. Rather it has succumbed to ahike in call charges, testimony to the growing clout of private telecom majors. As if this werenot enough, a financially challenged central government attempted to recover taxation for anoverseas acquisition with retrospective effect from a multinational telecom major. Mercifully,the Parthasarathi Shome Committee has recently recommended a three-year respite from suchdesperation. Low efficacy of government regulation of private sector-dominated industry hasonly laid the State open to more charges of crony capitalism. What happened in the case of coal? CAG discovered on the Coal Ministry’s files thatthe Secretary of that Ministry used the term ‘windfall gains’ to call for an auction of captivemines. Was ‘windfall gains’ a euphemism for private speculation rather than lost opportunityincome for the State? Here too the objective of public policy was the public good, theavailability of affordable power to fuel equally affordable cement and steel for our creakinginfrastructure. Notwithstanding the fact that the very concept of captive mines for limited in-house electricity generation ran counter to a fellow Ministry’s – Power – established schemesto generate electricity on a much larger scale for the public good by private sector entities, theCoal Ministry went ahead unmindful of the fact that were such mines given to privateelectricity generators through a single source – the Ministry of Power - these could have beenbought by the above cement and steel manufacturers under rates prescribed by Stateregulators. Surplus electricity, if any, could be passed on to the general grid for publicconsumption in an electricity-starved nation. Neither did the Coal Ministry have any policyfor allocating such mines nor did a myopic PMO apply itself to such key strategic shift eventhough the Prime Minister, an economist, was also the then Coal Minister. It would alsoperhaps have sounder economic sense to hand out larger number of contiguous blocks to asingle private/public power producer that would reap economies of scale rather than aninefficient system of a captive mine or two each for numerous steel and cement producers.Why this dichotomy between Coal and Power Ministries was kept alive even though thecommon binding thread remained the supply of electricity has no convincing answer. CAG’s report, that bases itself almost entirely upon the term ‘windfall gain’ used bythe Coal Secretary, nowhere states that this Secretary quantified the nature and amount of thewindfall gain. However, CAG does talk of lapsed performance bank guarantees thataggregate a pittance of Rs. 300 crore. Since such guarantees are normally based on a baseproduction value annually, how sacrosanct is the figure of Rs. 1.86 lakh crore that politiciansare so vociferously arguing about? Did the Coal Ministry undertake any study which showedthat it was in the best interest of the State to hand over these mines gratis in the expectationthat beneficiaries’ new investments in and long-term returns from them would equal theoriginal capital cost of such investments? Has some sort of rudimentary valuation of naturalresources been done that would give bases for calculating unearned income/loss? Further,would there be any ‘windfall gain’ if development cost of new mines and high depreciationof new mining plant and machinery were factored in or would speculative profit underwritesuch initial losses? Did CAG and/or the Coal Secretary independently assess Coal India’s(CIL) extraction costs before arriving at fantasmorgic figures of unearned income by theState allegedly gifted to private parties whose credentials were not verified or many whowere not even given a chance to state their case for an allocation? Moreover, did either the
  3. 3. Coal Secretary or CAG factor in an almost 1:6 or 7 differential between the ash content inimported and Indian coal while arriving at ‘windfall gain’? Furthermore, was any royaltyrequired to be paid to the State by such beneficiaries even if no capital cost was charged fromthem? Last, but not the least, if CIL was unable to produce more coal for generatingelectricity, should the shortfall be made good by industry-specific captive mine allocation orsuch mines given to private power producers? CAG’s report speaks of major infirmities inCIL’s equipment utilization and extraction capabilities, yet excludes its allocated mines fromthe Rs. 1.86 lakh crore figures, erring on the side of an inefficient government undertaking. Inthe political brouhaha over fixing responsibility on the Treasury benches by the Oppositionwith both eyes on Elections 2014, such fundamental questions of governance remainedunanswered.The author is a former Ambassador of India (Part-II to next page)
  4. 4. From Spectragate to Coalgate: Private Gain or Public Good-II? Barun Kumar Basu Faced by a hostile legislature and mounting public criticism, the state’s reaction wasperfectly predictable. Auction again became the fashionable buzzword. A familiar witch huntstarted that sought to relate speculative gains of captive mine beneficiaries to members ofScreening Committees, bank guarantees not renewed, notices not issued for not startingpower production by stipulated dates, etc., even as fundamental questions that affect thenation’s economic security burnt in the jet stream of public debate among heavyweight andoften eloquent worthies. The manner in which legislative debate meandered reminded me ofOliver Goldsmith’s pithy remark that “Surely the best way to meet the enemy is head on inthe field and not wait till they plunder our very homes.” Hang the perpetrators appears to bethe final verdict. However, there are no answers to what thereafter? The drift continues whilethe nation’s infrastructure crumbles to dust and its international credit ratings take a furtherbeating. There is no effort either to strengthen State regulators or even to boost electricitysupply even as national power grids collapse and senior Ministers remark that the best way tostop overdrawing is to jail senior officials of state(s) that overdrew such electricity! Evidently, public good policies of a welfare state, sound economics and businesssense were the biggest casualties. In the fierce debate over whether auction or first come firstserve was better, an ambiguous view of auction as the best option emerged unmindful of thepitfalls. Should revenue maximization by the State be accorded priority over the welfare of itscitizens? If so, then Indians must necessarily fork out Rs. 5 for a glass of water, Rs. 10 perunit of electricity, Rs. 1000 toll for a one way trip from Delhi to Agra via the YamunaExpressway, et al. If not, there ought to be a declared comprehensive State policy thatunambiguously lays out in fullest detail how the nation’s natural resources must besold/allocated while catering to the peculiar needs of an industry, transparency such as, butnot limited to, public disclosure of applicants’ credentials, parameters of selection and pre-sale/allocation oversight by a technically qualified agency of the government. The politics of state patronage and private speculation on public properties forpersonal gain-sharing between sellers and buyers must be replaced with a freshcomprehensive Transfer of Natural Resources Policy duly backed by a central legislativeenactment and a system of rewards and penalties that does not need public outcry orlegislative disruption for enforcement. The State needs to set up a quasi-judicial NationalNatural Resources Authority that would become the single-window clearance mechanism forall sale/lease of State-owned assets, backed by its own appellate tribunals with thejurisdiction of a State High Court to enforce failures in implementation oflease/contract/performance agreements and adjudicate on such strategic and high valueassets. Such Authority would also have the power to hold public hearings, decide on disputes,impose penalties, et al. The choice of the Chief Executive of such an Authority and its members woulddetermine its success or failure, success by integrity, knowledge and ground experience andfailure by their singular lack of some or all of these qualities. I therefore vote for Mr. RatanTata (who retires in December, 2012 from the Tata Group) whose impeccable integrity andprobity, leadership and experience in telecom, electricity, cement, steel and other strategicareas, makes him the ideal choice for the founding Chief Executive of such an Authority. For,similar organizations like UIDAI, under the stewardship of Mr. Nandan Nilekani, have
  5. 5. remained scam-free. After all, India’s growing private sector too should be allowed tocontribute to the national interest in a fair, equitable and transparent manner. At the sametime, it is imperative that a National Asset Register is created including all State propertiesfrom Rashtrapati Bhavan to a coal mine so that the State does not lose track of the assets italready owns and administers. The State must know what properties it possesses so that noone can again turn them into private sources of profit and illegal gain sharing with owners. Given India’s plummeting international ratings, crumbling/non-existent strategicinfrastructure and the need to attract FDI and provide domestic industry, agriculture and otherconsumers the basic ingredient of development, a combination of political and economicstatesmanship is the need of the hour rather than petty competitive advantage for Elections2014. The assets belong to the nation that alone has the right to use them for its own welfareupon its own terms and conditions so that public properties do not become the playing fieldfor private speculation and unholy personal gain. If coal blocks are indeed de-allocated, it isincumbent upon the State to reallocate them within the next six months with stringentmonitoring built into lease agreements between buyers and the State as also to recoverpenalties for non-performance, if need be, by establishing fast track tribunals. This woulddeliver a clear message of perform or be damned to prospective beneficiaries and warn fly-by-night operators and their beneficiaries of the stern intent of the State. Neither is repeated judicial intervention in matters of governance desirable orsustainable nor are laws that encourage malfeasance and end up feeding on the assets ratherbecoming a facilitator of development. As Frederic Bastiat, the 19th century French liberalpolitical economist aptly stated, “The mission of the law is not to oppress persons andplunder them of their property, even though the law may be acting in a philanthropic spirit.Its purpose is to protect persons and property.... If you exceed this proper limit - if youattempt to make the law religious, fraternal, equalizing, philanthropic, industrial, or artistic -you will then be lost in uncharted territory, in vagueness and uncertainty, in a forced utopiaor, even worse, in a multitude of utopias, each striving to seize the law and impose it on you.”That encapsulates the dilemma of the Indian State today.The author is a former Ambassador of India