My views on CAG report : Part 1 - The major flaws

CAG Report - Reading between the lines

Part 1 - The major flaws

The CAG estimated a loss of Rs 1.86 lakh crore to the exchequer on allocation of the blocks. However, the initial draft had estimated the losses at close to Rs 10.7 lakh crore...

          As read on 17 Aug, 2012, EconomicTimes.com

Flaw I - Geological Reserve vs Raiseable Coal
CAG report is based on Geological Coal Reserve to calculate the loss which is a major technical error and cannot be justified. To understand  why we need to have a crystal clear understanding as to how coal reserve is calculated and the key terms used to do so

• Geological Reserve -The coal reserve as given by nature.

• Net Geological Reserve - Due to uncertainty w.r.t to geological disturbances,thickness of coal bet and other factors the Net Geological Reserve is calculated as 

                       Net Geological Reserve = 0.90 * Geological Reserve

• Mineable Reserve - Now,all the Net Geological Reserve cannot be mined by Underground or Opencast system, due to Surface factor, Geological constraint, Ecological factor etc.The loss varies from 15% to 30%. Hence,

                       Mineable Reserve = (0.85 or 0.70) * 0.90 * Geological Reserve

• Mining Losses - In Underground Mining, Coal area is divided into smaller block for development and final extraction while some coal is left between these smaller block on the basis of rate of extraction, heating criteria etc. and due to this in underground mine the extraction of coal varies from 50% to 60%. So 

                       Mineable Coal (Underground) = 0.6 *  Mineable Reserve 

• Raiseable Coal - All Coal which is mined dose not reaches to saleable/dispatch point. The loss is attributed to transportation and weather which amounts to about 2% to 5%. 

So, based on the above the actual coal for dispatch in case of 

• Underground Mine is - 50% - 60%  of Net Geological Reserve.   
• Open cast mines is -  80% - 85% of Net Geological Reserve.

Thus the final output taken into account to calculate the loss in profit is not an big as reported.

Flaw II - Profit realized by private vs public operators

In case of Greenfield Coalfield coal area the investment on infrastructure required by an individual(private) operator is high compared to public undertaking(like CIL) as the latter mostly operates more than one mine in same area where as a private operator is only 1 bloc in an area. Also, public undertaking companies enjoy certain freebies and lower material cost than private operator who have to procure everything at market rate.
Thus the profit realized by public sector undertaking is much more than any private operator.

The CAG report, while trying to determine the the loss to the exchequer (Central Government Of India) , on coal block allotment to private sector took the economies/operational cost and profit percentage of public sector undertaking which the second major flaw and not technically justified.

In the next post I will list few key points missed out by CAG in their report, which makes the report/analysis incomplete for final justification/remediation.